Consumers have an attractive opportunity to layer in hedges at current levels. Short covering should provide short-term tailwind for prices and longer term, supply/demand balance picture is ticking more positive.
PRICE ACTION: Coffee prices are trading increasingly firm and there is now the strong probability that the market has formed a long-term bottom.
We are expecting this quarter to be a solid one for coffee prices (after a terrible previous quarter) and be the start of a longer-term move higher. Both Arabica and Robusta prices are grinding higher towards their long-term moving average – 200 day-moving-average (DMA) at 145 cts/lb and 2062 $/mt.
The key pivot price to watch for in Arabica is the cross higher of the 10 DMA and the 100 DMA which would trigger signals for CTA and momentum type funds to buy. This level is now around the 143 cts/lb price area.
HEDGING FLOWS & POSITIONING: CTA/trend fund flows have increased their shorts (net turned flat two weeks ago and now -12,491 lots short) – See Chart 2 – Indeed the “managed money” community is adding to shorts but large commercials (Arabica) are closing their short positions. This could have an explosive move higher in coffee as the CTAs “caught offside” would be forced to cover. This is a likely scenario in our opinion.
Buying from passive portfolio allocations (i.e. ETF/Index) is still muted mostly due to the unattractive costs to rolling long positions forward given the contango and little new constructive headlines.
The overly negative sentiment in coffee markets is now clearing and the probability is now for 2017/18 coffee prices to move higher.

Chart 1 – ICE Robusta – 6 Month – Source: Bloomberg & CTC

Chart 2 – ICE Arabica – Positioning & Open Interest – Source: Bloomberg, CFTC & CTC
FUNDAMENTALS: There is an increased risk of shortage of Robusta ahead which is fuelling an increasingly bullish picture on London market.
Vietnamese coffee exports for the month of April were 852,384 bags or 27,5% lower than the same month last year at a total of 2,246,939 bags, the Vietnam Department of Customs have announced this week. The smaller “new” crop in the world’s biggest Robusta production country has been reported to be around 24 to 25 million bags, which shall inevitably reduce availability for export also given the fact that domestic demand will stay within the 3 million bags range this year.
Despite improved supply from Uganda, Indonesia and Brazil with a better but not significantly substantial Conilon coffee crop (the option of issuing import permits for foreign grown Robusta is still a matter of debate within the Brazilian government), the overall sentiment is that these producers are not expected to partly mitigate, let alone completely eliminate, the prevailing deficit in global Robusta coffee supply for at least the next six months.
These factors move the S/D fundamental picture a notch more constructive for London coffee market, in a short to medium term view.
We continue to believe that consumers should use the current market conditions to layer in hedges (even long-dated hedges) – SEE TABLE 1 & 2 – for selected structures and levels.
The derivatives market is pricing ICE Arabica range for Dec17 at 123 – 170 cts/lb and Dec18 at 135 – 180. The median analyst forecast for Arabica is ticking higher, it was 150 cts/lb for 2018 last week and now at 154 cts/lb and 160 cts/bl thereafter. We expect these forecasts to continue being revised higher as new harvest move forward.
Contact the desk to discuss risk-management and hedging services for coffee – contact@comtradingcorp.com.
REGIONAL SPOT PRICES
BRAZIL
Arabica Spot Price 10/05/2017 USDcts / lb 142,67
Robusta Spot Price 10/05/2017 USDcts / lb 127,90
Total Arabica Exports 01/01/2017 to 30/04/2017: 8.997.852 bags
Total Robusta Exports 01/01/2017 to 30/04/2017: 79.426 bags
INDIA
Arabica AA Spot Price 10/05/2017 INR / kg 226,50
Arabica A Spot Price 10/05/2017 INR / kg 214,50
Arabica PB Spot Price 10/05/2017 INR / kg 200,50
Total Arabica Exports 01/01/2017 to 08/05/2017: 23.172 MT
Total Robusta Exports 01/01/2017 to 08/05/2017: 76.189 MT
UGANDA
Robusta Screen 18 Spot Price 10/05/2017 USDcts / lb 96,63
Robusta Screen 15 Spot Price 10/05/2017 USDcts / lb 91,63

Table 1 – ICE ARABICA – Consumer hedges – Source: CTC

Table 2 – ICE ROBUSTA – Consumer hedges – Source: CTC
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Commodities Trading Corporation is a private advisory company specialized in commodity risk-management and hedging. We service a growing need in the natural resources sector for unbiased and strong expertise and provide our services to an array of corporate clients and financial institutions. We are experts in derivatives and monetizing volatility and develop corporate strategies for hedging energy portfolios, using bespoke derivatives solutions for price risk mitigation.
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