Weak Emerging Countries Currencies and the Drop of Commodities

The jobs market in the USA has been stable in general, with the public sector losing a few jobs after the sequestration but helped by hiring coming from the private sector.

In the last two sessions of the week the stock exchanges halted the fall, which had lasted several days, slightly recovering, but in the end stayed at the same levels seen in my last report – two weeks ago.

Two of the main indexes of commodities, the CRB and the SPGSCI have gone up 1 % since May 24th, while the DJUBS (former AIG) has dropped 0.51 %. Only natural gas, silver and sugar have suffered losses in the last 9 business days as there was a holiday in the period.

Coffee in NY tested the 125 cents per pound at the end of May, with the funds increasing their shorts but faced good buying from the industry, preventing greater damage. London, on the other hand, fell US$ 6.24 having as a backdrop a good availability of coffees (and inventories) and prospects of a large Vietnamese crop. In the physical market, the main origin sees the new crop arriving and the differentials being nominally weaker, although less than expected, maybe due to some hope that there will be help from the government. A new line of credit from the government should be approved soon, however nothing in regards to programs of “drying up” of inventories. The carry is far from being small, as well as the production of the cycle 13/14 which should surprise us (to the upside as per the market perception).

The weakening of the currencies of producing countries vis-à-vis the dollar makes it less painful the behavior of the C. Friday’s close, in cents of real per pound was R$ 2.7086, better than two weeks ago when it closed at R$ 2.6037, and this in part should explain the better volume of sales in the futures market that we have seen – which by the way has the company of Peru and Colombia.

As to the Brazilian currency, it seems that the central bank wants to avoid that the 2.15 level be breached too quickly, which does not mean it will not happen, specially now after the negative revision of the country’s sovereign debt by the S&P. Some analysts see 2.30, a fact that will bring more sales since there is a lot of coffee to be sold.

Talking about it, it is sad to notice how Brazil has neglected the important tools for the negotiating of coffee, like the futures at the BM&F and CPRs. The country has always provided alternates for the commercialization of its products, different from most of the other origins, Both the volume at the BM&F and the term sales (including the CPR) indicate that the country has stepped back, damaging all involved in the chain of commerce. Some are saying that the producers are to be blamed, as they got used to the market going up for two years in a row, however many disciplined professional coffee plantation owners disagree with this.

We should congratulate CACCER for one more excellent seminar, which by the third year in a row has been taken place at the Cerrado. This forum has found a date in the coffee calendar and it is rich in the exchange of ideas by its participants, who are known in the global coffee market by their practices and wisdom in dealing and trading coffee. In the conversations (which I have had the pleasure to participate so far in all the seminars) we have always seen points of discussion that reinforce the proper attitude and discipline by the producer and associates.

Going back to the prices perspectives, there is no indication of a significant recovery, except for some covering by the funds that have a large short position. London has room for further drops and the dollar firmness against currencies of emerging countries show a strong negative correlation, which makes me believe that commodities may fall even more. The investors this year alone have withdrawn more than 22 billion dollars from the commodities markets, related to the figures which point to a greater surplus in the metals and agricultural products and elevated inventories.

The Brazilian exports, which should stay at the same levels of the previous year (which had a smaller crop), give a sign to the buyers that there is a large inventory, which will eventually show up in the market at some point, specially with the harvest going on. Even if the government frees up more money for financing, all that this makes is to give more rope for the hanging, which will not only occur if there is a weather event that causes losses in production.