Coffee: Single-Digit Temperatures And Arbitrage Reversion

The unemployment benefits requests in the U.S. lowered this past week to their lowest level in five years, a statistical data that investors have used as a barometer to guess how much the FED will diminish its participation in the bond markets.

News that the ECB is thinking about buying securitized assets as well as lower interest rates in economies such as Korea and Australia plus an increase of Japanese investments in foreign bonds, have all helped the U.S. dollar to have its best closing since March 13.

The main stock indexes went up again and among the commodities, grains and coffee in NY were the winners for the week.

The Arabica gained some ground with temperatures at 2 degrees Celsius in The Pocos de Caldas town and other cities in the Mogiana areas, which were not cold enough to burn the coffee but gave sequence to the funds short covering that we saw the week before. The arbitrage between the ICE and LIFFE was another fuel since several participants reverted their winning positions with the move to above $.50 cents of discount (it is worth noting that in mid-March it was at 35 cents).

The strong increase on the C made more coffee available in Brazil and other African origins. The differentials finally widened a little giving opportunity for the roasters and trade houses to book more purchases both for the short term and the second half of the year.

The announcement of the minimum price in Brazil at R$307 per bag confirmed the expectations that some had and the government defends itself saying that this level is equal to the production cost of the CONAB for the current crop. The producers complained noting that CONAB itself is forecasting a cost of R$333.826 per bag for the 2013/14 crop. The next step expected would be an options plan or the PEPRO so that inventories may be transferred to the Union.

The Brazilian exports in April totaled 2.7 million bags accumulating for the period July 12 to April 13 a volume of 25.70 million bags. This figure is similar to the 25.78 million bags in the same period in the previous year. May 13 and June 13 should be months with high shipment volumes, although perhaps not sufficient to break the 32 million bags record in the cycle, which many were expecting before.

Regular rains in Vietnam make the trade work with the prognosis of a crop greater than 25 million bags. Uganda confirmed another month with exports above average and the production in that country should surpass 3 million bags.

Another highly significant producer, Colombia, gave happy news to the consumers with a production for April 13 surpassing 1 million bags for the first time since the 2007/8 crop. Still, the current crop (main one and the smaller) once more should be below the target of 10 million bags that some official government entities aimed at.

Last week’s closing at the terminal is not discouraging for the bulls of the Arabica, but served as a caution note after the many times the market has failed to stay above 145 cents. Now for London, I still believe that whoever has coffee should take advantage to fix (sell), unless of course, a new cold wave were to scare the funds which have lowered their short positions in NY to a great extent.