Morgan Stanley Coffee Report - Sept. 14, 2020

Coffee suffered heavy losses to open the week, falling 940 points to 123.05 and printing a low of 121.65 in the final 30 minutes of trading.  By % today’s loss was the largest of the past 10 years, falling 7.1% (just beyond that window is the next largest percentage decrease, 8.08% on Aug 24, 2010), and the 18th largest drop by value in the past decade basis settlements.  Early declines were manageable in reaction to the hefty spec length (largest net long managed money position since Nov 2016) and the appearance of rain in some of the forward forecasts for the Brazilian coffee belt.  While the prior presence of longs on a weather thesis is of some debate, it is possible that higher confidence in a normalized picture gave license to some speculative bears who had been waiting for such a forecast to sell.  At 9:34am the 3 successive waves of selling arrived, sending prices plunging from 127.30 to 123.75 on around 2300 lots in a 3 minute period (1700 estimated outright / non-implied lots, 125.90 VWAP).  Recent spec longs as well as some bulls who had recently found the market a bit toppy sought the exit, preferring to wait for better opportunities ahead.  Notes of concern from non-Brazil origin managers were sounded with respect to stability of the internal markets.  While the chart saw damage,  taking out any number of support measures; trend lines, moving averages, 61.8% retracement of the 1 year high / low, etc, the Brazil vs Certified stock story remains unresolved, and dual notes of caution may be warranted on behalf of euphoric bears.  The mentioned August 2010 8% selloff saw a new low the following day, yet took off from there en route to a $3+ market half a year later, and didn’t retrade those lows until May 2012.  While that certainly would be the base case of few or any, it is illustrative of the potentially fleeting nature of such dramatic price action.  Separately, while certs rose 70 bags as a container of Uganda in Antwerp passed 250 bags of Hondurans in Germany like ships in the night, the real intrigue may have been in the grading data.  Those 320 bags of Ugandans were the lone passing lot of a total 2929 bags graded, an 89% failure rate.  Whether the bulls or bears ultimately prove right is unknown, but there will likely be no shortage of agita for each in the coming weeks and months.  Meanwhile, Robusta fell $46 to 1387, proving unable to keep pace with KC both directions.  The arb tightened to 60.14 in  the process.