Coffee Traders' Forum - A Discussion about Coffee Futures Trading


Coffee Traders Discussion Forum

Coffee Traders' Forum

Hackett Financial Advisors

Fundamental Summation:

We have discussed coffee quite a bit in prior special update reports over the last several months. The story is very clear and simple. Global coffee production has been stagnant for 5 years running. This lack of global production growth against ongoing global coffee demand especially in Asia has destocked all the above ground exporter stocks. We are not aware of a time where such supplies have been any tighter other than during 2010/2011 at which time there was a surplus of Robusta coffee whereas today there is very little. All seemed to be going well for the bears until the Brazilin harvest began and the crop starting coming is smaller than expected. Chronic smaller bean size and lower quality beans have caused a larger number of beans to be put into a bag versus normal. This in our view has lower production by about 10% from what was expected. But it is actually even more sinister than that. Not only is the overall crop down 10% but the quality of the crop is very poor pushing more of this supply into the low quality pool and way from the high quality pool. The loss in medium to high quality Arabica from last year we feel could be close to 10 million bags. That loss represents 70% of last year’s entire Colombian crop to out that into perspective.

There are no above ground stocks left to draw from. This would suggests that Brazil will need to reduce exports down to 28 million bags down from 33 million bags a year ago to keep from running out of coffee. You would need to go back to 2008 for the last time that Brazil exported less than 29 million bags of coffee. No one really knows why the crop came in smaller than expected. The weather was good. Everyone is coming up with all kinds of reasons and excuses but none of them really make any sense. We think there may be a structural problem with the current coffee tree population of Brazil that is the carryover effect of the damage done during the historic drought in 2014/2015. Incidence of Broca insect infestation and a general lack of output might suggest that the coffee trees in Brazil are permanently weakened and have lost their peak production potential. Only time will tell but the bears are banking that the summer of 2018 harvest being a record at 60 million bags. The performance of this year’s crop puts that potential into great question and should weather actually become a problem in the upcoming growing season what then? We are not aware of a more fundamentally bullish market at the moment than coffee with the potential for an historical shortage on any severe weather problems. We are monitoring Brazilian cash coffee differentials, Colombian cash coffee differentials, green coffee stocks levels, certified stocks levels and bull futures spreads for the early warning signs of a supply vacuum trade. End users should continue to protect upside price risk especially on any near term corrections.

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