Coffee, Cotton, Sugar Other Ags React To Cyprus

The euro zone came back to the news front with the tentative resolution imposed to Cyprus to confiscate part of the bank deposits in that nation so that they could continue to have a credit line from the European Central Bank (ECB).

With a non-explicit pressure by Germany, Cyprus would only receive 10 billion Euros additional if they used 5.8 billion Euros of the bank deposits. This situation got worst later in the week as the Cypriot parliament voted against it and Russia was rumored to intervene as apparently more than 50% of the money in the banks there belong to Russian citizens.

At the time of this writing the banks in that Mediterranean island remained closed, supposed to open now on Tuesday, March 26th. Now imagine if you had the money in one of their banks, what would you do? It is difficult to see how investor confidence can be restored, the impact is less important due to the size of the Cypriot economy, 18 billion euros, but the scary part is that a precedent may have been set so that other member countries in a delicate situation may have a similar fate (Spain, Italy and Portugal).

The European bourses closed lower between 1.5 % and 3.36 % and were sideways in the US. The euro currency, which had slipped during the past week, recovered towards the end of it on Friday due to positive signs from Cyprus.

The main commodities indexes fell a little, and among the producers the ones losing the most were cotton, sugar and gasoline.

Coffee in NY had new lows, trading at US$ 132.05 cents per pound on Wednesday, ending the week US$ 2.91 per bag cheaper. London closed below US$ 2,150 per ton but it was not a sudden drop, despite the promising forecasts regarding rain beginning to fall in producing regions.

The arbitrage between the two markets went back up above US$ 40 cents, after having touched US$ 35.63 cents.

In the physical market, the flow in Brazil diminished with the reposition narrowing. It is important to point out the small difference between fine coffees and rio, which is only at US$ 9 cents per pound! Another interesting fact is that someone, a dealer or exporter, sold Brazilian coffee at 24 cents of discount against NY – the numbers do not add up (unless the coffee was carried and the seller decided to pass on the gains of the spread).

Still focusing on the main origin, the logistical problem exacerbated by the shipments of the soybeans crop, has caused delays on other shipments, fact that the market continues to ignore as well as the loss in production due to rust in the coffee plantations of Central America. The Monetary National Council will vote next week (Thursday, March 28th) on an increase of the minimum price from R$ 262.69 to R$ 340.00 per bag. In the follow through, there will be pressure towards a program of price equalization, as well as the requirement for more money with longer terms to finance warehousing.

It is good to remember that the market reading on what has been delineating in Brazil will not necessarily help prices in NY. I explain: to increase the minimum price and even extend the terms for loan payments or warehousing do not make the offer of coffees disappear, but only give more rope to strangle those who are already in a desperate situation – exception to be done, of course, in case the government were to decide to buy coffee and make it disappear from its warehouses.

The other origins of Arabica are doing little since they are in the off-season and the Robusta producers continue eying the normalization of the weather in Vietnam, at the same time that they hear official declarations that the production has been lost already.

Two banks that operate in the commodities market had reports with a more positive bias on prices on the C contract, pointing to a deficit in the production of that variety next year. It is worth to note that the banks do not work with the same numbers of some trading companies which say that the upcoming crop will be at least 52 million bags, while others believe in a number identical to 2013.

With the Brazilian real weakening, with NY not bleeding more and the funds near their record short position, we have factors that may diminish a little the pain of Brazilian producers. The confirmation by the US central bank, the FED, that it will continue to supply the market with dollars may be another positive factor. The risk is to see how the markets will react regarding Cyprus and the effect of the contract at LIFFE with rains arriving at the right time in Vietnam.

With the implicit volatility trading at the lows of the last 19 years (as mentioned by John Barnard) I believe that buying options may be the best option.