Coffee: Cold Weather Causing Funds to Cover

The positive results of the American banks and information that the Fed does not have a set plan about ending QE, both have helped the S&P index to reach a fresh historical high.

The main stock indexes closed the week in positive territory as well as the commodities indexes.

The coffee market closed the period higher US$ 4.37 per bag in NY and US$ 6.78 per bag in London, with the performance of the former being a lot more volatile and erratic than the latter.

Forecast of a cold night this Tuesday July 23rd and some weather reports with a stronger stance forecasting frosts in some areas (which do not have a lot of coffee) had the funds that are short to cover.

With the prices rising, the graphs also showed covering points and following up a week that was already positive, we ended up having a Thursday which at some point had gains of almost US$ 6.05 cents per pound but ended up closing lower. Then, last Friday, another 300 points higher to begin only to lose 485 points by closing time. A nervous market indeed.

The sentiment of the participants even with the higher close for the week ended up being even more negative, since the funds may have bought up to around 10 thousand lots and technically have more reason to sell rather than keeping them.

The origins took advantage, wisely, to sell as much as they could. Brazil was the highlight, but all other producing countries participated in the selling, both at the ICE and LIFFE.

In the physical market, the differentials cheapened and allowed a large volume of deals from producers to exporters and from exporters to roasters.

The implied volatility of the September options firmed by 8.5 % due to the movement of the protection buying, more than the 4 % seen for October options, 4 % for December and 1 % for the March 2014 options.

Even if the cold weather really does not bring any risks to coffee plantations, which Friday was even more evident, the investors who are short prefer not to run the risk of losing a lot of money with their positions, which makes sense in terms of diminishing their exposure.

The arbitrage between the Robusta and the Arabica continues to be the greatest support factor for the latter not to slide any further and the weekly close below 35 cents was due to London being closed already when NY fell last Friday.

In Brazil we had news that the government is working on a plan of options which in case the producers exercise their right to sell, they will then buy the coffee from them, drying up the market inventories. A plan, that without a doubt is more effective for prices than other ideas that were being considered.

Aside from the weather to agitate the prices, only a definition that truly diminishes the coffee availability will make the bulls happy.