levels are low, or better saying “below those judged consistent”, and finally repeated that the
committee is prepared to provide addition accommodation if needed.
As a result, two-year treasury yield went down to all time low, gold surged to all time highs, and the dollar weakened.
Yesterday (Monday) the National Bureau of Economic Research (NBER) said the US recession ended in
June 2009, the longest in the post war period (18 months), but unfortunately those without a job
– and the rate has been high for the longest span as well – do not feel like things are better.
Year to date the stock market in US is in positive territory, besides trading-volumes being below
average, while commodity indices are slightly unchanged. Among individual commodities coffee is
the leader with 34.53% gain, followed closely by cotton 34.51% rise, and wheat 32.59% surge. The
biggest losers are natural gas, down by 29.29%, cocoa off 15.51% and sugar that lost 11.73%.
After our last report, two weeks ago, the “C” has tried twice to break the US$ 200.00 cents/lb
level without success, and with the dry weather pattern now being broken by higher humidity
levels and today’s rains in part of the coffee belt in Brazil, prices started to
discount the drought-premium it had built. Weather forecasters are seeing more rains for the end
of September and beginning of October, which if confirmed could take another toll on prices.
Technical focus: Monday’s fall took NY below the 20-day-moving-average and today’s action could
not take it back up. The uptrend channel support was also broken and if the market does not
manage to consolidate above 180.00 more sells-stops will be triggered below 179.60. Funds’
position should probably be around 30K lots netlong, meaning a lot more longs could be
liquidated. LIFFE is holding near its recent high, but only a move above 1700 could really
attract more buyers, while key support is at 1570.
Fundamental focus: Colombia is just about to start its harvest and differentials have gone almost
20 cts lower in the last two weeks. Other-mild producers are getting ready to start the crop as
well, but it does not mean that coffee will be available in good quantity in less than a month.
The only potential origin to sell, Brazil, has taken advantage of higher board levels and
certainly it will not participate on the selling at lower levels (yet) – meaning diffs will get
tighter. While rains in Brazil are welcomed and needed, it was excessive in CAM and Colombia, but
it has stopped now after sadly causing huge damages to Guatemala’s population. Coffee trees have
also being damaged by the high moisture level, and it seems like there will be some loss for the
upcoming crop. We have not heard though of any major production losses. On the robusta side
Vietnam’s crop is being officially mentioned to be around 18 mln bags, but the trade community is
working with a 19.5 mln crop, slightly higher. Certified coffee in US has broken the
psychological 2 mln bags barrier, and as I mentioned here a couple of moths ago I believe it will
be near 1.5mln bags by year end as the drawdown will continue and no new coffee will be
delivered. The dollar weakness could eventually attract more buying of commodities and other
assets, but at the same time with no inflation-risk the macro players might not increase their
position.
I think the short-term is vulnerable to the downside, and it would not be surprising to see the
“C” sliding another 13 cents to test 170.00…
The Conclusion
Implied volatility is giving the impression that not much change is expected for the board, but
the open interest of the 170 put could cause some damage for bulls, while a move above 205.00
would put in danger those without protection.
As we get closer to mild-coffee harvest in CAM and Colombia, higher prices should start to bring
more price fixation and differentials have already started to easerecently.
The fear of drought in Brazil has proven to be early as rains are starting just when it should,
but certainly it is needed to be regular from now on. As a result of the rains that fell in South
of Minas and the forecast of more rains coming this week and at the beginning of October,
NY commenced a correction, that could take the market further down.
Bulls are betting that commercial buying will provide good support, but I doubt it will be enough
if funds are to drop 1/3 of their position quickly.
Since London has not followed much NY on the way up, it might be limited on the downside, even
though it seems like there is plenty of fixation that needs to be done for the new crop in Vietnam.
I am bearish on the short-term.
We shall see.
Best regards,
Rodrigo Costa
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