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KC tumbled lower ending the day with a 265 point loss at 12230 basis the March contract, its worst one day loss since the 8th of January. The session began trading in a relatively stable 12380-12520 inside range, but at 9:40 a.m., prices gave way and fell from 12390-12245, in sync with a sinking BRL. The lows of the past 3 days were violated, as was the 9, 26 and 40 day moving averages, and, adding insult to injury, stochastics crossed to the downside. One only need overlay the intraday real chart with that of KCH8 to observe the currency’s impact on the rhythm of today’s trading. Open interest fell by 4,945 lots in spread and outright long liquidation on yesterday’s action, which did little to encourage already disappointed bulls. From a flow perspective, industry nibbled as a matter of course and origin were in absentia, however yet again it was the Algos that kicked into a seemingly insatiable sell mode. Volume at 58,495 included 21,369 spreads (12,862 H/K) and was the highest since the 14th of November. Tomorrow’s open interest should prove interesting.
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Good morning,
We began the week on a bit of a neutral note for KC really, the consensus was decidedly more bullish than the market reaction that eventually saw a small downtick on the settlement. Robusta meanwhile came under a bit of pressure upon a decidedly bearish COT. Options volumes were notably reduced in Robusta, Arabica meanwhile saw some good size, much like the futures contracts (a mighty 11,399 ots of the H/K structure traded between -2.20 and -2.35) In macro news, the dollar rallied against most major currencies, with the exception of JPY. Oil also lost ground, as did metals. U.S. oil inventories probably expanded by 800,000 barrels last week, a Bloomberg survey showed ahead of API and EIA data due today and tomorrow, respectively. That would be the first increase in 11 weeks. At time of writing, London Robusta (March) is showing 1760 (+$3) and Arabica (March) is showing 124.55 (-0.40). Currencies (Bloomberg) GBP – 1.4001 EUR – 1.2350 BRL – 3.1555 Good morning, and Happy Monday.
The latest set of commitment of traders reports revealed that in KC, the funds added 3,920 fresh shorts, leaving us with a new net short of 58,790 whilst in Robusta, we saw a reduction of 7220 off the net short, leaving us 15,957 short. London therefore looks the more bearish of the two contracts, it’ll be interesting to see what happens with the Arb as a result, it was looking pretty cheap at 43 and rallied to its high of the week on Friday at 47.45 towards the close. In macro news, the dollar finally firmed after a week long slide overnight. President Trump gives his state of the union address later in the week, and is expected to discuss a big push for infrastructure spending. At time of writing, the preopen shows March Robusta at 1765 (-2) and March Arabica at 125.50 (+0.35). Coffee Crops Have Been Hit By Climate Change But Sumatran Farmers Are Fighting BackEmily Beament HuffPost UK 29 December 2017 Increasingly unpredictable weather caused by climate change is impacting coffee harvests in Sumatra. Some coffee farming groups in the Indonesian island’s northern Gayo Highlands say they have seen coffee harvests fall by up to 50%, with damage to plants caused by unexpected rain or dry spells. The rain has also affected efforts to sun-dry the coffee beans, while warmer temperatures mean pests and diseases previously only seen at lower altitudes now threaten the high-quality Arabica coffee for which the highlands are known. Unpredictable weather is damaging coffee flowers and cherries in Sumatra, Indonesia (James Robinson/Fairtrade Foundation) In an attempt to rectify this, co-operatives that sell their coffee as Fairtrade-certified are using money from the scheme to invest in measures to counteract the impacts of rising temperatures. Through Fairtrade, producers receive a guaranteed minimum price for coffee and an additional “premium”, which communities decide for themselves how best to spend. In the Gayo Highlands these include schemes such as installing electricity, building libraries, providing cervical cancer screenings and purchasing ambulances, buying pruning scissors and strimmers providing agricultural training. But cooperatives are now also turning their attention to preventing climate change hitting productivity by distributing new, more resilient varieties of coffee plant. Farmers are also encouraged to plant shade trees in the coffee gardens to protect the precious harvest, prevent erosion on sloping hillsides and provide an alternative income such as avocados, oranges or timber to reduce reliance on a single crop. Coffee cooperatives are facing a number of challenges, including ageing coffee plants and young people seeking alternative jobs to farming. But the chairperson of 2,000 member-strong Permata Gayo cooperative Armia Ahmad said a big issue is the changing weather. “The climate has already changed, for example the harvest is normally starting from October to January, but now we can’t predict it any more,” he said. The harvest had not come by December, he said, adding: “This year in December, it should be the dry season, but now rain, rain, rain.” The cooperative is providing hundreds of thousands of seedlings of the new, more resilient varieties of coffee to members, and has built a canopy for its drying areas to prevent rain from damaging the coffee during processing. They are also providing avocado trees to farmers to generate income if the weather hits the coffee harvest. At another of the region’s cooperatives, KBQB, the management team have also reported a shift in the harvest and increases in pests and diseases being found in the region’s high altitudes. Another local environmental problem is illegal logging, despite the remaining natural forest being protected, which causes flash flooding and landslides when it rains. The cooperative is implementing environmental measures because, the team say, they have been informed by various sources that climate change is affecting Indonesia and planting trees can be climate-friendly. Cooperative chairman Rizwan Husin said: “We distribute trees to farmers so they can plant on their farms, and we advise the farmers to grow shade trees, and on the unproductive land to grow trees for wood and avocado.” The reforestation scheme being run by the cooperative has seen a group of farmers plant 24,000 trees over 32 hectares to create sustainable agroforestry on unproductive land. But the chairman said he was “really, really worried” about climate change. “They say that within 50 years there may be no more coffee in Gayo, and it may be similar in Africa,” he said. “We need not just a local movement, but a world movement for the climate.” KC capitalized on yesterday’s rally to close the day at a 10 day high of 125.50 with a gain of 115 points. The dollar extended its decline, after the ECB kept interest rates unchanged, and Mario Draghi expressed little concern about the euro’s gains, as it traded to its firmest level against the dollar (1.2537$/eu) since December 2014. Market sentiment started off on a positive note and was especially encouraged by strength in the BRL, following yesterday afternoons unanimously upheld conviction of former president Lula…who proceeded to announce that he has accepted his party’s nomination for a return to the presidency, as further appeals are expected. A 20 point gap higher on the opening was followed by 1000 lots of March trading which boosted prices from 12310-12445 at 4:19 a.m. KC proceeded to rally to 125.50 and origin took advantage to place hedges as the market traded to a 10 session high. A reversal to the downside at 10:51 time saw 1100 lots of March trade from 12305 to the day’s low of 12170, which was curious, as the high of the sell-off was 5 points lower than the high of the aforementioned 4:19 am buying. Stops in both directions, or perhaps coincidence, however prices quickly rebounded to yesterday’s high of 12310 a level which proved to be today’s fulcrum. A 270 point back to back gain is the best since Dec 29-Jan 2nds, 540 point 2 day accretion, and a 10 day high was certainly a welcome respite.
A reversal of yesterday’s losses in KC which closed the day at 122.50 +1.55, largely courtesy of currency related support, as the market lacks momentum and remains in a sideways pattern. The dollar index traded to a 3 year low after U.S. Treasury Secretary Mnuchin, speaking to reporters at the World Economic Forum in Davos, endorsed a weaker greenback stating that “obviously a weaker dollar is good for us as it relates to trade and opportunities”. A well-seasoned coffee trader pointed out that in euro terms KC traded to the lowest level since the 10th of February 2014 as the $/EUR traded to its highest level (1.2402) since the 17th of December, 2015. The intraday rhythm of trading closely mirrored the BRL which strengthened to 3.1750 $/R by the close of New York and further steadied to 3.1625 (+2.4%), after the second of three judges in Lula’s appeal trial voted to uphold a graft sentence, thus ruling out the possibility of an acquittal. Open interest climbed by another 2,483 lots and over the COT reporting week has increased by 8.757 lots, despite a net change of only +.50 in a 3.95 point range. The BMF will be closed tomorrow.
Arabica rejected a brief sojourn below the 120 line, uncovering convincing support before rallying back to close the day +.15 at 121.15. Sellers arrived in waves at intriguing times; 8am EST, 8:30, 9:25, each time popping volume and driving prices in a straight line lower. Follow up action was sparse however, and if it was an attempt to trip stops the effort was largely in vain, with coffee quickly rebounding. That rebound may have been a repudiation of prices below 120, yet it was also perfectly in line with a move in sugar, and similar to though lagging trends in crude and the broader commodity complex. Generally speaking, traders seemed checked out and increasingly bored by the action. Robusta suffered a day after her sister market, falling $37 to settle 1756. While Arabica disavowed prices outside the range to the downside, London did so to the upside. Stiff resistance has shown up in the form of origin hedging, and incentive for sustained higher levels seems sparse. Today’s COT was much awaited – as is the case in what has been a flow driven mkt – and the spec position came in at the higher end of expectations at -55,050 as gross shorts piled in to near-record levels at 92,361. The index long grew 6725 lots, and commercials were busy on both sides, with longs growing 9981 lots and shorts adding 3917.
Brazil will reap a record coffee harvest this year, supported by strong yield improvement in both main producing states, the official Conab bureau said, backing market expectations of a bumper crop.
Conab, in its first forecast for 2018 coffee output in the world’s top producing country, pegged the harvest at 54.44m-58.51m tonnes, a figure which, even at the bottom of the range, would beat the current high of 51.37m bags achieved two years ago. “After three years of difficulties in coffee production, this year is much more favourable,” said Silvio Farnese, coffee director at the agriculture ministry’s policy unit. Output last year – an “off” year in Brazil’s cycle of alternate higher and lower arabica-producing years - totalled 44.97m bags, Conab said, lifting its September estimate by 200,000 bags. The upgrade was down in the main to an improved figure for arabica, which accounts for the majority of the country’s output. ‘Expectation of high production’ For this year, Brazil’s arabica output was forecast at 41.74m-44.55m bags, an increase of up to 30% year on year, with strong gains in states including top grower Minas Gerais. There, production was forecast rising by up to 26%, to 28.77m-30.29m bags, backed by an extra 50,000 hectares of mature plantation, besides a boost to yield prospects from “good flowering” in October and November, when a more typical rainy season kicked in too. Indeed, the decent blossoming period and the “regularisation” of the rainy season, combined with it being an “on” season in the two-year cycle, “lead to an expectation of high production” in Minas Gerais this year, Conab said. The harvest forecast was receiving an extra boost from plantations in the south eastern region of Zona de Mata, where successive years of weather upsets had reversed a contrary pattern, whereby trees had seen their production cycle operating in a contrary way to that in most of Minas Gerais. Pest, defoliation worries Conab flagged some concerns over Minas Gerais output thanks to dryness between July and November which caused some trees to lose leaves, “especially in low altitude regions”. Outbreaks of borer beetle and potential knock-on effects from temperature volatility were also cited as production threats. “However, in general, the crops have been responding well to the resumption of rainfall in November,” the bureau said. Enemy turns friend For robusta coffee, Conab forecast Brazilian output this year at 12.70m-13.96m bags, growth of up to 30% year on year, led by growth in Espirito Santo, the top robusta-growing state. Indeed, the Espirito Santo harvest of robusta beans was seen soaring by up to 46%, to 7.66m-8.65m bags, after “very good flowering” – boosted, ironically, by dryness in the state, where drought has been a longstanding setback to output prospects. “A determining factor for the number of flowers observed, besides the good health of trees thanks to the rains that came in [Brazil’s] autumn and winter, was the August drought,” Conab said. “That promoted a water stress which, with the return of the rains in September, stimulated good uniformity of flowering in most regions.” More to come? Nonetheless, Conab added that Espirito Santo output would still in 2018 not reach its potential, with many plantations reseeded after tree losses to drought yet to come into production – or not yet replanted at all. Furthermore, many of the state’s producers, whose finances were sapped by successive poor harvests, lack the resources to invest in crop inputs. “Even if it exceeds the last harvest, the 2018 crop should still be less than the potential harvest,” the bureau said. Conab vs industry While Conab coffee harvest estimates are viewed historically as underestimates, Thursday’s outlook appears close to industry estimates. Rabobank on Wednesday, for example, restated a forecast of a 59m-bag harvest this year, comprising 42.4m bags of arabica and 16.6m bags of robusta. Indeed, Conab’s forecast is above estimates from many other observers, with MB Agro pegging the crop at 51.0m bags and Sincal at 47.0m bags. A Reuters poll last week put the average forecast at 53.89m bags, with estimates ranging from 47.0m-60.0m bags Coffee rose on a technical correction climbing 265 points to 123.10 (KCH8) and posting a higher high. At the point of yesterday’s nadir Arabica had shed 11.5c from the Jan 5th high, nearly equal to the prior 11.85c rally over a 6 day period commencing on Christmas (trading) Eve. This has become a market of extremes, albeit narrowly defined ones, with moves in the range either finding air or gravity before running into walls of size. It is worth noting that in the past 3 months KCH has been entirely constrained within a 118-133 range, and only wandered outside the 120-130 range 3 times to the upside and 6 times to the downside. Volume on the day was aided by another dose of heavy spread action, though the breakdown was more egalitarian with 19k+ total switches being spread up and down the board. HK tightened a tick to settle -2.45 on 5272 lots. Options were moderately busy, with the H 110 / 105 PS (1100x) taking the top spot as paper closed out a condor. Similar trading was noted in sugar in the H 12 / 11 PS (7700x) and it is assumed to have been a softs-centric fund trade. Robusta too was buoyant, rising $42 to 1769 (RCH8) as H/K exploded $11 higher to +15 on 4000+ lots of volume. Both GCA and ECF stocks were released exhibiting inventory draws – the GCAs slipping by 106k bags in December and the ECF by 580k bags in lagged reporting from November.
A lackluster trading session in KC settle down 120 points at 123.95 with the high for the day (125.95 +.80)in place by 7 am, and from 8:10 a.m. onward, the market remained entrenched in negative territory. The first higher high in 6 day’s proved fleeting as momentum sellers reemerged, and as the selling dried up yesterday’s low held and support was found at the 12540, 26 day moving average. Open interest increased by 4,855 lots noteworthy for a day the market closed unchanged, yet all but the close traded in the red. The assumption is there was a mélange of new non-commercial shorts, index and commercial longs and a fair chunk of new spreads, however we look forward to Friday’s COT for greater clarity. Since the beginning of the year Coffee and Sugar have had a strong positive price correlation, apparently under the influence of similar new year spec flows, not driven by action in the BRL. The lowest settlement since Boxing Day comes in 10 cents above last year’s low (11550), which for point of reference occurred when funds were net short 37,000 lots, compared to what is likely 50,000+ as of today’s close. While much attention has been paid to index fund buying during the reallocation, the question remains how much more selling power is left from the seemingly relentless systems funds? A gap lower opened the week in both N.Y. (127.90-127.65), and it was downhill from there as the opening print held as the high for the day. Friday’s COT came in on lower end of expectations showing that funds covered net 9,675 lots as the market rallied 8 cents which served to set a negative tone for the session. The commercial side saw 5,237 longs liquidated while shorts increased by 2,547 lots as origin hedged into the rally. Adding to negative sentiment was the dollar index, which following 3 straight weeks of declines. rallied .46%, while the euro correspondingly sank .5%, its largest decrease in 6 weeks. Friday’s open interest fell by 1,395 lots as recently acquired longs jumped ship. Today’s sell off, settling down 330 points at 125.15, was the sharpest drop since the oft referenced 30th of November, however a bit of solace can be found in finding support at the 40 day moving average of 126.75, basis the second month chart. Tomorrow’s o.i. will be watched to see if shorter term systems have reengaged on the short side.
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January 2019
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