For consumers, coffee prices are at an interesting level to layer in protection hedges. We believe ICE Arabica will outperform Robusta. Both look attractive up to 2 years out. We look at optimal hedge structures which provide best value.
PRICE ACTION: Coffee was one of the worst performers across the commodity space in April. At 135 cts/lb, ICE Arabica is now below its 5Y average of 148 cts/lb.
The recent selloff from 146 cts/lb to 128 cts/lb provides an opportunity for hedgers to layer in protection. The 6% increase from the recent price lows shows how coffee, which has been less volatile, can move quickly – SEE CHART 1 –
The long-term support/ resistance levels are clear at 120/165/185.
Medium-term, the chart shows an oversold market, selling momentum slowing and prone to a turnaround.
HEDGING FLOWS & POSITIONING: CTA/trend fund flows are currently having the most impact on prices, as S/D fundamentals are weak. The recent acceleration in lower prices combined with spikes in open interest coincides with the latest CFTC data. Managed money has flipped to net short and are rapidly adding to positions – See Chart 2
Buying from passive portfolio allocations (i.e. ETF/Index) are at very low levels historically driven by the current prompt contango combined with no new constructive “headlines”.
As the chart technicals indicate, coffee prices discount negative news at current levels. The sentiment is overly negative as positioning has flipped to short (from spec community). The market, especially, 2017/18 could be set up for a move higher (perhaps violent).

Chart 1 – ICE Arabica – Daily Since 1Y – Source: Bloomberg & CTC

Chart 2 – ICE Arabica – Positioning & Open Interest – Source: Bloomberg, CFTC & CTC
FUNDAMENTALS: Prices for Arabica at the moment, are a reflection of the current market snapshot with ample supply.
With the 2016/2017 marketing year visible, and Indonesia and Brazil starting a new harvest season for 2017/2018, we can turn to the new harvest. Net output for these two countries is estimated to be down ~40 mil bags, with Vietnam estimated so far to be flat in terms of output.
While consumption growth is not expected to be much higher than 1% y/y, balances should again be in deficit in 2017/18. The market is not trading the improved balance ahead for 2017/18. The contango appears to have peaked as the consumer stocks should not increase.
Arabica coffee price, will react much more explosively than Robusta if hint of a shortage appears ahead.
The Arabica-Robusta spread, at ~40cts/lb level illustrates that Arabica has the potential to move significantly higher from current levels – SEE CHART 3 – We believe that the coffee coffee price will rise above the 5Y average and both Arabica and Robusta market tightness will pull each other higher.
For consumers, using current price levels as good entry points to initiate hedges is appropriate in our view – SEE TABLE 1 – for various structures and levels.
The derivatives market is pricing ICE Arabica range for Dec17 at 120 – 170 cts/lb and Dec18 at 130 – 180 cts/lb. The median analyst forecast Arabica is for 150 cts/lb for 2018. Our view is that this will be revised higher as we move into new harvest.
Contact the desk to discuss risk-management and hedging services.

Chart 3 – ARABICA/ROBUSTA SPREAD – 1 year in cts/lb – Source: Bloomberg ICE & CTC

Table 1 – ICE ARABICA – Consumer hedges – Source: CTC
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.
For more information about what we do, how we can optimize your hedges and directly improve your bottom line, contact us at contact@comtradingcorp.com.
CTC Marketing Commentary Disclaimer – This marketing communication has been prepared by CTC traders and sales personnel. The information contained within this marketing communication is general market commentary providing only the views an opinions of CTC traders and sales team. The views and opinions expressed herein may be changed at any time without notice. This material provides only a limited view of the market and does not constitute investment advice and or investment research. It has not been prepared with the legal requirements to promote the independence of investment research. It is also not subject to any prohibition on dealing ahead of the dissemination of any investment research. The information provided does not constitute an inducement, invitation or offer to engage in any investment activity. CTC neither makes nor gives any representation or warranty, express or implied as to the accuracy or completeness of the information and opinions contained and no responsibility or liability is accepted by CTC for the same and CTC shall not be liable for any direct, indirect or consequential loss or damage suffered or incurred by any person upon reliance of any statement or opinion or other such information. This communication is directed at CTC‘s professional customers and not intended for retail or private customers.