Coffee: London Leads And May Drop More

The IMF revised downwards their forecast for the 2014 US GDP from 3.0 % to 2.7 % and recommended that the FED continues to prepare themselves to diminish the quantitative easing, although many still are uncertain as to the better way for this to take place.

The stock market waits for new tips coming from the June-19 FOMC meeting, but just in case, some are taking their profits on concern that a reduction of liquidity may happen sooner than expected.

The Real
In Brazil the government cut the IOF for derivatives helping the dollar futures rate to drop, as well as the spot momentarily. During the week the real traded down to 2.1656 and up to 2.1182 with news of government intervention, but ended up closing the week above 2.15.

The main commodities indexes remained sideways in the last five sessions, but if we look at the products that are part of the basket we note that coffee is leading the losses at -5.05 %, followed by cocoa at -4.83 % and the industrial metals. On the positive side, cotton has gone up 5.35 % and heating oil 2.72 % and sugar 2.44 %.

N.Y. Prices
The Arabica in NY made new lows with a drop of $6.88 per bag and the Robusta slipped almost the same, $6.54 per bag. Although the latter anticipated the lower trend.

The movement in the physical weakened with the basis firming, which is normal. Apparently the middlemen in Vietnam made more aggressive offers, encountering little interest on the other side. The roasters in general are not in a hurry to increase their positions since many already have a comfortable position both in flat price and differentials.

The ICO in its May report alerted to the fact that origins will likely incur losses this year due to many of them selling their coffees below production costs. As recently noted by a friend who is an economist and big market player, in a scenario of coffee surplus, prices tend to find the lowest production cost. I dare say that we have seen these levels to be breached and painfully kept below production costs for some time.

Global Production
The USDA released more reports from some producing countries showing a slight drop for Indonesia, Peru and Mexico -- around 400 to 500 thousand less bags in 2013/14 compared to the previous year, and a production of 53.7 million bags for Brazil, being 38.5 million of Arabica and 15.2 million of Conilon. The market perception is that the actual numbers are higher, especially the inventory of passage that the USDA says it is 8.23 million bags.

The funds continue to have a participation in the selling of the futures market, but it is important to notice that the origins are not completely absent. Exporters who are short in differentials see their books with worry and as well as the producers await a move up to have a less painful replenishment.

London, which we said that should be a point of sale around $2000 per ton, although it has lost almost $300/ton, it still vulnerable to reach fresh lows which will certainly bring N.Y. along.

With the funds having a large short position at the C it is less likely at this moment to see the breaching of the $110.00 cents per pound, but a strong price recovery seems unlikely as well.

Have a good week.