Flowers, age of certs and options

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

Newedge - Rodrigo Costa

04/10: Coffee Futures Drop As Supply Concerns Ease

NEW YORK (Dow Jones)--Coffee futures plunged to their lowest levels in nearly six weeks as traders took profits ahead of harvests throughout Central America and Colombia.

Analysts said losses early in the day triggered a string of automatic sell orders that sent prices to their lowest level since Aug. 27.

"The funds that were long have some stops in there to protect profits," said analyst Bill Raffety at commodities futures brokerage Penson GHCO, referring to speculative investors, such as hedge funds, that had standing orders to close out positions once prices fell below certain levels.

Coffee for December delivery settled 8.6 cents, or 4.8%, lower at $1.7250 a pound on ICE Futures U.S.

Coffee futures have soared since June on fears that drought in Brazil, the world's biggest coffee grower, would damage its crop of highly sought arabica beans and leave world supplies unable to keep up with demand. But those concerns now appear overblown.

"Prices are very unjustified," said Tom Mikulski of Lind-Waldock in Chicago.

Now that Brazil is getting wetter weather and a global surplus is more likely, traders are quickly pulling back. Monday's session marked the fourth consecutive day coffee futures settled lower.

"October kicks off harvest season for Central America and Colombia," said James Cordier of Liberty Trading Group. "Supplies are not going to be huge, but they will be available this month."

He said prices could dip as far as $1.65 pound in the coming days should funds continue closing out long positions, essentially cashing in on bets that prices would rise.

29/07: Brazil's Bumper Coffee Harvest Nears End

Brazil's bumper coffee harvest has gone smoothly this year and is almost entirely completed, says Gil Carlos Barabach, a coffee analyst at local agricultural consultancy Safras & Mercado. This season, the arabica harvest which began in around May, was spurred by attractive coffee prices, he
says. Barabach pegs the 2010-11 arabica and conillon crop at 54.6 million 60-kilogram bags. Carlos Santana, a trader at Santos-based exporter Interagricola, agrees that Brazil's harvest has gone well and was helped by favorable dry weather. The quality of the beans has been exceptional, he says.
Moreover, concerns about the development of the next 2011-12 coffee crop in Brazil have been eased by recent rains, he adds. Brazil is the world's No.1 coffee producer.

A diferença entre os cafés Conilon e Arábica Café - Revista Cafeicultura

27/09: Rain Bodes Well For Brazil's 2011 Coffee Crop

DJ MARKET TALK: Rain Bodes Well For Brazil's 2011 Coffee Crop[Dow Jones]--Rain in Brazil's main coffee growing regions is "fantastic" news for local producers, says John Wolthers, a trader at coffee exporter Comexim. Although the rain fell later than expected, it is now coming at an optimal time to trigger good flowering on coffee bushes that determines the size of next year's crop, he says. Although the next crop will be seasonally smaller, Wolthers says that the output is likely to be a good volume despite the long period of dry weather that threatened to hurt the development of the 2011 crop. "This is fantastic news for producers," Wolthers says. Moreover, Wolthers says that Brazil's coffee producers have cash in their pockets after brisk sales throughout 2010 and they don't currently face pressure to sell, he says. Brazil is the world's No.1 coffee producer. Contact us at +55-11-3544-7074; Anthony.Danby@dowjones.com

23/09: ICE Coffee Higher, Few Brazilian Sales

1631 [Dow Jones] Coffee futures on ICE ended higher, but the rise failed to trigger significant trade in Brazil, the world's No. 1 coffee producer. Average prices for a 60-kilogram bag of arabica coffees in the local spot market Thursday are some 15 Brazilian real, or $9, lower than last week after bean
prices dove early this week, says Gil Carlos Barabach, a coffee analyst at local agricultural consultancy Safras & Mercado. Moreover, Brazil's producers are waiting to see whether rain forecasts in the coming days will be enough to alleviate potential damage to next season's coffee crop, he says. "Having sold a lot of beans already, they can afford to sit back and wait," he says. Arabic coffee for December delivery settled 0.9% higher at $1.8165 a pound.