Flowers, age of certs and options
Monday, October 04, 2010
Commodity markets were very volatile at the end of 3Q, on what seemed to be fund profit-taking,
especially for the softs. The quarter though was very positive if one looks back at the beginning
of the period when both equities and commodity indices were trading at 2010 lows. Three months
later the CRB is up 10.96% and the S&P 10.77% higher. The greenback on the other hand lost 11.40%
against the Euro, and the Dollar Index is down by 8.49% during the same period.
US personal income and spending last week came a little higher than expected, as the pending home
sales also rose more in August than forecasted, but the quick reversal of US dollar today, with
the newswires appointing to lower risk appetite, pushed lower several asset classes.
The coffee market was not able to sustain at US$ 190.00 cents, the upper part of the range I
suggested on our last report, as it encountered commercial selling that later called speculators
to liquidate part of their longs. With the weather being regular in the major origin, pictures of
flowering started to flow at everyone’s e-mail – making some traders bearish.
Technical Focus: The sudden hike and fall of the “C”, which broke the 180cts and traded close to
170cts, does not give much courage for bulls. Technically if prices dive below 170.00 more stops
will be triggered, and we could se a much bigger chunk of longs being dumped. NY needs to
consolidate above 170.00 and recover above US$ 173.70 cts, otherwise the 50% retracement at
165.95 will be the next target. LIFFE does not look good either, and even though funds are not as
long there as they are on ICE, if November breaks below 1600, and even more important 1570,
prices could test 1490. A move above 1668 could calm down bears.
Fundamental Focus: The broad-range that the coffee market traded in the past sessions was useful
to point where commercials are “parked” at, as they decided to participate on the selling near
190.00 and on the buying near 170.00. As rains reached the entire coffee belt in Brazil, in very
good volume and pace, the trees “woke up” and buds and flowers can now be seen in the South of
Minas and other areas. So, if there was still any “weather premium” it is now gone, even though
excessive rains in Central America and Colombia might have caused fungus and potential (small)
losses. The market right now perceives that the flowering is negative, and for the despair of
the origins that were not able to take advantage of higher prices, funds are still holding a
sizeable long position that could add more selling pressure in the market.
Bulls argue that the industry will provide support, which might be partially true. Why partially?
Because of the reason we mentioned here last week: roasters have seen higher prices, and now that
we are reaching the end of the off-peak period, why would they rush? There were rumors that I new
turn of price increases of roasted-andground was being prepared, so maybe it could be set aside
for awhile, as well as the flat-price coverage.
Differentials for mild-beans have not eased further, but neither firmed with the collapse of the
board. Brazil certainly will be out of the market for a while, as they sold quite a bit and may
now allow them to seat on the sidelines. A weaker future-market nominally firms up
natural-differentials, which could turn to be positive down the road, as ICE certified stocks
become (more) attractive again. Talking about it, last week the exchange released for the first
time the age of the inventory. According to the data, on December 1st 2010 the 1,959,146 bags
will have on average 871.78 days, and US$ 13.91 cents of aging-penalty. Once more this is the
average, but one should not forget that coffee with 30 cents of more of discount can be found. I
got an e-mail from a contributor complaining about the data, mentioning that it is not precise as
there is a good chunk of re-certification that has made part of the coffee “younger”. Well,
according to the rules, to pass the grading test the coffee has to be “greenish”, so…
Back to Brazil, the government announced that it will auction the remaining of the official
inventory of coffee from 1987 to 1999 crops – about 480K bags. Only the local roasters will be
given the right to buy it, and according to the announcement it will be spread out not to impact
prices. There goes the last bag bought by the instinct IBC (Brazilian Institute of Coffee). Bears
argue that even the government wants to take advantage of the current high prices.
On the robusta side we hear that the Vietnamese crop might be as high as 20.5 mln bags, 2 mln
bags more than official sources. London led the price fall in the coffee World yesterday, would
that be the reason?
New York is in very dangerous territory as there are 7,565 lots of the 170 put opened, between
November and December expiration. After that the biggest OI is on the 150.00 strike, where very
few players believe the market could go (how many thought NY could trade at 198.00 in
September?).
Maybe the 170/190 range could have been wrongly predicted and the lower boundary might be pushed
a little lower – US$ 160.00?
I am traveling tomorrow to Switzerland to visit some customers and attend Friday’s Coffee Dinner.
If someone has an opening for a visit please just let me know.
Have a good week and good trades.
The Conclusion
NY failed to sustain above US$ 190.00 cents and not even the weakness of the US dollar was able
to provide support for prices after pictures with flowering hit the inbox of market participants.
With a higher forecasted Vietnamese crop, some say above 20 mln bags, and a weak technical
picture, London collapsed today taking NY down just when of the options-pit was opening.
The wide range of the past 5 sessions was useful to uncover commercial activity at the extreme
points, and while bulls argue that more roasters buying underneath will provide support, bears
say that a new rally will find more origins willing to hammer the market.
On the downside the danger lies on the size of the open interest of the 170 strike, which could
provoke a new wave of selling. Also the new that just came out regarding higher taxation on
fixed-income investments for non-Brazilian residents, could reverse the rally of the Real. The
finance minister doubled the tax from 2% to 4% in an attempt to contain the Brazilian Real
appreciation.
Best Regards,
Rodrigo Costa
rodrigo.costa@newdge.com
