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Psychology of succeeded crop to pressure on coffee markets

Domestic coffee price and futures coffee prices are having an unclear trend. The psychology of “supply over demand” seems to make pressure on the market.

Prices continue to fall.

Coffee prices in Central Highlands fluctuated around +/- 1,000 dongs/ kilogram for the whole week. As if domestic prices were at 37,500 dongs in the weekend before, the bid price was only 36,500 dongs/ kg in several following days. However, thanks to the “little flatted trend” of futures prices, green coffee prices fortunately get back to 37,200 dongs/ kilogram on this morning 2013 September 7th, 300.0 dongs/ kilogram lower as compared to last week.

Futures prices of LIFFE// NYSE// London during this week also surrounded from 1,750 dollars/ ton to 1,800 dollars/ ton. Closing price of last Friday (September 9th) of London was 1,764 dollars/ ton, 15 dollars/ ton decreased as compared to last week (see chart 1). New York’s Arabica futures price is 1.55 cts/lb equivalent to 34 dollars/ ton after a positive week.

Export prices still stay firmed, from equal or plus 10 dollars/ ton as compared to listed price of futures trading floor for type of 2.5% black beans.

Every August and early September is usually a summer vacation of coffee roasters and coffee traders so that the market is quite still. On the other hand, inventories are not much and in the warehouse of rich traders so that domestic prices or floor prices must be drastically increased to make them sold out. With the expectation of 40,000 dongs to 42,000 dongs, the current domestic prices must fill a big gap to shift from inventories to export.

Moreover, the harvested psychology is pressuring world’s market with different unbeneficial supply-demand news. Therefore, coffee buyers only buy a necessary amount to finish really-wanted contracts and wait for a better price.

To many world’s professional coffee traders, good prices do not mean high futures prices. The lower differential prices against floor’s listed prices get, the quicker deals are done. Let’s assume that futures price is 2,500 dollars/ ton and export price is minus 100 dollars from listed price, for instance, and export price is fixed at 2,400 dollars/ ton, they are willing to buy. And the differential price as current is 10.0 dollars/ ton against London prices, coffee buyers feel it expensive and wait for a lower differential price.

Chart 2: London’s net Robusta inventories till September 2nd (by writer)

Inventory: Rise and Decrease.

Futures trading floors of LIFFE and NYSE inform that end of 2013 2nd September, net inventories of certified Robusta continued to decline, down to only 77,030 tons, 1,720 tons decreased as compared to latest inventory of 15,270 tons, and 44% down as in comparison one year ago of the then 137,650 tons (see chart 2). The floor says there has been no lot of Robusta sent to be certified around 2 recent months.

This confirms that all of Robusta exports from any origins across the globe in recent months are being delivered directly to coffee roasters. At the one side, the phenomenon of net Robusta stocks decreased reflects that demand for Robusta now is stayed firmed. On the other side, it reflects Robusta’s current prices on consuming countries are higher than floor’s listed prices.

Chart 3: Net Arabica Inventory as compared to futures prices (source: ABN AMRO)

Meanwhile, in New York’s Arabica trading floor, inventory is increasing around 2.8 million bags (60 kg per bag) for export prices are more reasonable thanks to the affection of many aspects especially the fact that Brazil gets a successful harvest. As of 2013 5th September, New York’s Arabica net inventories were 2,784,881 bags, of which around 2/3 are stored in Europe.

Brazil’s crop year 2013/2014 is a cyclic “lost” crop as bio-cycle of Arabica coffee trees which every succeeded crop comes after a lost crop. Many coffee experts estimate that Brazil has already harvested above 85% of farming areas. With this progress, the figures of 53 million bags of this “lost” crop may become visible. CONAB – a coffee capacity estimation organ of Brazilian Ministry of Agriculture – previously estimates the output of this crop of about 48.6 million bags. In addition, the Brazilian Real which depreciated continuously against U.S. dollars helps Brazilian Mild to have a stronger export.

Supply exceeds demand?

Last week, Volcafe of ED&F Man Group, a big Switzerland – based coffee trader which has a coffee processing plant and a rep office in Ho Chi Minh City, predicts that the world is exceeded about 3.8 million bags of coffee gain in the next crop year 2013/14, starting on 01/10/2013. According to them, only in this crop which will be ended on 30th September, the market has exceeded about 8.2 million bags.

Supply which exceeds demand is mainly due to Brazil’s succeeded crop. The company also estimated that Brazil’s output of crop 2013/14 is estimated at 57.2 million bags which are much higher than above recent forecasts. They admit that Arabica exceeds about 3 million bags while Robusta exceeds 800,000 bags as well. Colombia’s Arabica output also increases 1 million bags. At Robusta producing countries, Volcafe estimated that Vietnam’s next crop year will increase up to 30 million bags as compared to 26 million bags this year; and Indonesia, the company estimated its coffee production will be declined by 12% against last year, only about 10.5 million bags.

International Coffee Organization (ICO) estimated the global demand for coffee is about 140-142 million bags/ year.

In general, coffee markets currently share a psychology of a succeeded harvest across the globe. That is why many banks and investment funds have recently adjusted their estimation of coffee prices. As last late July, Goldman Sachs had lowered its forecast of Arabica futures price down to 130 cts/ lb instead of 145 cts/ lb previously for the futures of 3, 6 and 12 months from the date of forecasts.

However, news of good harvest is one side while controlling export’s volumes to hold up prices is other story. If it is said that supply was over demand last year, why were futures prices and local prices of Robusta still stayed firmed? Was it a result of Vietnam’s solutions on natural export controlling?

»Translated by wscafe.com> original source by The Saigon Times Online, author: Nguyen Quang Binh, for Vietnamese version, please see it here. W/scafe takes its all responsibilities of the accuracy and exactness of the translated documents.

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