Marex Spectron signalled optimism over a recovery in arabica
coffee futures, saying that current values "underprice" a looming output
deficit, amid a rash of selling by momentum funds also evident in the cotton
The London-based commodities house said that price signals
from cash markets for arabica coffee were "finally turning", flagging
relatively strong values of Colombian and Brazilian supplies compared with New
The reversal was happening at a time when the arabica coffee
market was moving from a "material surplus" in 2016-17 "into material deficit"
"The 2017-18 arabica deficit is beginning now to be felt in
the cash market."
While Marex did not split out its individual supply and
demand estimates for arabica coffee, including robusta too, it forecast a world
production shortfall of 4.4m bags for 2017-18, compared with a surplus of
900,000 bags in 2016-17.
'No weather premium'
Indeed, while the tumble in arabica futures - which for
September delivery touched 115.50 cents a pound in New York last week, the
lowest for a nearest-but-one contract in 15 months – looked reasonable if
considering only 2016-17 only, it was not supported by future prospects.
"Today's futures price is a fair reflection of today's 2016-17
arabica surplus, but underprices the 2017-18 overall deficit," Marex said.
The price also "contains no weather premium for 2018-19",
for which weather concerns will begin to become particularly acute around
September and October, with the flowering period for Brazilian plantations.
"Three out of the last five Brazil crops have been weather
impacted, and another weather problem in Brazil in 2018-19 doesn't bear
'Huge reallocation of
Marex, which acknowledged that an assessment in April that
prices were "closing in a major low" had proved wide of the mark, flagged "extraordinary"
selling by funds in fuelling the decline.
"The commodity bear market since 2012 has led to a huge
reallocation of assets from managed (human) funds to systemic (computer) funds,"
the group said.
"We can point to $25bn in assets that has been withdrawn
from managed funds that historically traded coffee."
This "huge reallocation from value investors to momentum
investors" means that short-term price moves last longer and "can significantly
"This is particularly true in agricultural crops when one
crop year has very different fundamentals to the next," as appears to be
occurring in arabica coffee, with the turn from world output surplus to
deficit, and has already played out in a tumble in prices of cotton, facing
Will producers 'capitulate'?
To bet on arabica coffee futures continuing to decline would
require foreseeing that Brazilian producers will not exploit their increased
bargaining power, gained by the prospect of a 5.5m-bag drop in the country's
overall output to 50m bags in 2017-18.
"One needs to believe
that the Brazilians will capitulate and sell the market lower to make the
momentum funds right."
In fact, a "lower arabica crop and lower carry-in stocks
should give the producer strong pricing power and we would expect to see producer
resistance to current prices," a factor "confirmed" by cash market moves.
Arabica coffee futures for September closed on Tuesday up 0.6%
at 125.30 cents a pound.