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Weekly Coffee Perspective – May 14th to 18th of

A HEAVY MARKET LOOKING AT BRAZILIAN FORECASTS

Equity markets are enjoying a positive performance in May, with US indices being helped by the second quarter earnings that surpassed the expectations on 70% of the companies that are part of S&P500.

The volatility index, VIX, has consistently moved lower to early February’s levels, signaling that investors have calmed down and are feeling comfortable with stocks, also attracting algorithms systems to pill up on risk assets.

Commodities have also appreciated with energy raw materials leading the gains influenced by the end of the United States agreement with Iran taking the CRB to the highest level since July 31, 2015.

Coffee failed to hold the gains of the beginning of the month and New York is trading back below US$ 120.00 cents per pound, pushed by a new wave of spec selling as we get closer to the arrival of the Brazilian crop.

London followed the arabica to trade in the middle of the range it has been at since November 2016.

Fundamental Focus

The participants of the Santos Coffee Seminar in Brazil followed closely the high-level presentations taking place at the auditorium, mainly those that focused on the influence of the funds in the future market and the ones that would give a hint on the World supply and demand for coffee.

Adding to the theme of the event the conversations that took place at the lobby of the hotel and the corridors of the event had several analysts and traders discussing the current surplus, as well as the 18/19 and potentially even the 19/20, based on the upcoming Brazilian crops.

True or not the sentiment is that the conilon crop can surprise even more on the upside, with some agents suggesting a figure as high as 18 million bags, which along with a 45 million arabica forecast would add up to a 63 million bag production in 2018/2019. Although these numbers are far from being consensual, I did notice an increase in the crop average among players that have been cautious on their forecasts, but we all have to wait for the bulk of harvest to start and then assess more carefully.

After the COT report showing a significant reduction of the funds short position, it was difficult to find anyone bullish.

In general, it seems though that everyone would like to see the board trading higher to allow more coffee to be trading in the cash market at differentials more attractive than those offered by local exporters and trade-houses. One could argue that the flat-price being where it is it should compensate, but as many buyers have separated desks, the differential one and the futures, the task gets more challenging.

For Brazil at least the prognostic of further devaluation of the BRL could do the job to avoid farmers selling at even more indigestive prices.

Looking a little down the road though, production growth will reflect the unprofitable levels that most of the arabica producers are facing, and even for the most efficient one, Brazil, it is a must to see the board being compensated by the local currency, which once the presidential campaign takes a clear shape could in fact reverse the recent weakness of the Real.

In my opinion it is unlikely that we see a steep(er) decline of prices that would take the "C" contract, for example, below US$ 100.00 cents per pound, except for an even greater depreciation of the Brazilian Real to, say, R$ 4.20 or more.

At the same time, the amount of sales that awaits a hike of the terminal seems to be enough to cap any strong upside performance, as we saw in the Commitments of Traders of May 1st, which is a good thermometer that the Brazilian crop of 18/19 still needs to be sold in greater volume until it can give a breath to the terminal.

The good news is that we will have a very interesting second half of the year with the arrival of a larger Brazilian crop that certainly will not be as difficult to trade as the previous one (fingers crossed). The political scenario in Brazil shall gradually get clearer, eventually attracting foreign capital again at a time when the bears in the cafe market may also start reviewing their bets.

Between here and there we will fare through a cold winter in Brazil, apparently the last positive argument of the bulls.

Technical Focus

July in New York needs to hold above US$ 116.90 cts and then 115.30 to avoid a test of 113.35, 112.50, which if breached could accelerate the move towards a more longer-term support seated at 104.15. Resistance levels are at 120.10, 123.75, 125.95 and 130.60 cts/lb. In London we must observe 1,722 and 1,671 on the downside and 1,772 and 1,846 dollars per ton on the upside.

Have a nice week and good trades,

Best regards,

Rodrigo Costa