Coffee: Premature Cold Alert Causes Covering

The European Central Bank not only confirmed the expectations of an interest cut to a new record of 0.5 % per year but also surprised the markets signaling that it may begin to tax banks which have excess of capital.

In the U.S., the FOMC meeting did not bring any news. The unemployment rate however fell to new lows since Dec/08, standing now at 7.5 % after 165 thousand new jobs were added in April.

The main stock indexes continue their bullish stance, keeping the expectations for no change in the liquidity programs by the central banks in the wealthiest regions of the globe.

Among commodities, the highlight was the recovery of the grains due to the delay in the planting in the U.S. and the strong push of the Arabica coffee.

The C contract, after having reached new lows last Tuesday, gathered strength to gain more than 5 cents per pound on Thursday, forcing more covering of the short positions of the funds.

Forecasts of lower temperatures in the producing regions in Brazil triggered the alarm about the proximity of winter for this region and since the coffee producers maintain their hope for an increase on the minimum price by the Monetary National Council, there was less resistance for the futures prices to go higher.

Talking about minimum prices, the announcement that was supposed to happen last Monday and then Thursday never happened in the end, frustrating those who believed in the government’s punctuality. News leaked in some press outfits informed us that the problem lies in the government not accepting an adjustment that goes beyond R$ 310.00 per bag, in reality this figure seems to be R$ 307.00, while the producers are asking for R$ 337.00 as the minimum, The government’s argument is the inflationary pressure, and the producers say is that inflation itself plus higher costs. In another study, this one on time, it was noted the lack of qualified labor for the harvest, since younger people continue to migrate to the cities.

A reader wrote to us about last week’s commentary, asking what is the volume that the system funds operate in the coffee market. Non-official data from the exchanges indicates that in the U.S. futures markets more than 60 % of the daily volume is traded by the high-frequency funds, a level not too distant from the one that the locals and scalpers used to operate from during the open pit session times.

Coffee
The International Coffee Organization, published the coffee exports of the last 12 months (up to Mar/13), totaling 113.2 million bags, being 67.3 million bags of Arabica and 45.9 million bags of Robusta. Compared to the same period in the previous year, the volume is 9 million bags higher, 2 million more only for the Arabica and 7 million for the Robusta. If we take into account the visible diminishing of inventories for the Robusta and the increase for the Arabica, we conclude once more how much more the demand for the former has been growing.

The moving of the physical was a little better on the spot, while the differentials in the origins remained firm, giving few opportunities for those looking for bargains. Short term demand is more noticeable in the U.S., while the interest for the majority of the industry is geared towards the end of 2013 and beginning of 2014.

The Brazilian harvest should begin soon and the question is how much inventory that country will be able to carry. The increase of the minimum price will give more room for the financing, since this figures is used by the banks in the calculation of the collateral, but still will not make the coffee to disappear immediately.

The inflationary pressure in Brazil, a smaller crop and the carrying seen as too high, continue to be factors that should weaken the differentials, even if the terminal begins to drop again.

The weather this week in better, or the announcement that it will get colder gave some room due to the funds being short. To invert the position, history tells us that this rarely happens in this period, due to weight of the seasonality and the fact that prices drop to mid July.

A closing of 145 cents will be needed for the market to finally break the interval of 10 to 15 cents that it has been trading for the past few months.

Have a good week.