Main Commodities Index Up On Energy, Metals Recovery

We had nervousness in the stock exchanges, now dominated by trading systems programmed by algorithms that trigger the buying and purchasing based on different data and information available.

For instance, early last week there was a short piece of news supposedly sent by a news agency talking about explosions in the White House, which caused a drop of 1 % on the stock indexes in the USA within one minute (there are trading systems which “read” key words and trigger the orders). Soon after that, the same news agency said that their twitter account had been hacked and denied the information, making the indexes recover all the losses.

This is a crazy collateral effect especially for the brave small investors that insist on operating short term in these markets.

The lower GDP growth in the USA for the first quarter of the year announced last week plus the expectations that the ECB will cut interest rates renewed the hope of the markets about the continuation of the bond purchases program of the governments.

The main commodities indexes went up for the week, helped by the recovery of the energy complex and precious metals (which were substantially lower in the week prior).

Coffee in NY, higher the week before, ended up being the commodity that fell the most for the week, losing 6.04 % or USD 12.24 per bag (July '13 contract). The failure to breach the 145 cents per pound plus the constant selling of the commercials fueling the partial covering of the short position of the funds were some of the reasons. Another factor was the steeper drop in London, triggered by rains in Vietnam.

In regards to the funds position, it is worth noting that 2.6 million bags were purchased up to Tuesday, April 23rd, and the same volume sold by the commercials, divided in 1.26 million new shorts – origins and trading companies – and 1.26 of roasters and traders undoing their fixations. Nothing too exciting for the bulls.

To make matters worst, the Arabica contract lost 4 cents in one minute trading only 1500 lots (425 thousand bags), which discouraged the more optimistic ones.

On Friday, the continuation of the lows could be partially due to the extending on the vote for an increase on the minimum price for coffee by the Brazilian government and the announcement that the R$ 340.00 per bag should not be approved and instead we will have something around R$ 315.00 per bag. Note that this increase does not mean that the government will buy coffee, at least for now.

The physical market with the drop in the two markets came to a stop and the differentials of mostly all origins firmed. The Robusta, which has a more consistent demand at this moment, was able to show some reaction in the futures price but nothing that convinced the producers/exporters to make more of their product available. The holidays this week in Vietnam make the terminal as the only place for those who need log purchases in their books.

Once more it is worth mentioning the profitability that the Robusta has been giving to its producers in some regions. For instance, we have the program in Uganda to plant 20 million bags of coffee with high productivity, part replacing old trees and part planting new ones. I would not be too excited with a bullish cycle staying for too long. On the other hand, the Arabica producers suffer, and it seems that they will suffer more losses at the terminal ahead, which is unfortunate for those who have not sold their coffee yet.

The seasonality in the consumption, less during the Summer in the Northern hemisphere, is another factor that lessens the urgency for covering along with the recent performances on the exchanges. Therefore, it seems to me that the markets may test new lows – save any weather news or plans of coffee withdrawal by the Brazilian government.

For those who have scarce qualities at the moment, including Rio coffees, the scenario is less caothic, mut still far from being the dream prices of up to a year ago.

The arbitrage LIFFE vs ICE is getting to a point where the Arabica may find some support, which could narrow another 7 or 8 cents per pound, meaning that the C could test the US$ 125 cents area.