Speculators quit coffee shorts as price hopes rise

The revival in arabica coffee prices may prove more than a temporary blip, commentators said, as speculators showed a huge turnaround in sentiment towards the bean, closing a stack of short positions.

"The breaking dawn for arabica coffee may have finally arrived," Joyce Liu at Phillip Futures said, attributing the turnaround to sentiment towards disease pressures in Central America, as highlighted by the International Coffee Organization, besides ideas of reduced selling by growers.

"After easing more than 30% last year, and trading mostly sideways at its low for two months, we see the potential of short term strength that may send prices above 160 cents a pound," she said.

Besides coffee leaf rust and cherry borer beetle, Central American countries such as El Salvador and Guatemala, which produce prized arabica beans, also face an outbreak of roya fungus, which reduced yield potential by causing coffee tree leaves to turn black and fall off.

'Limited further downside'

Separately, Brazil's Conselho Nacional do Café producers' group flagged "positive" fundamentals, with 2013 an "off" year in the country's cycle of higher and lower producing years, and said a Goldman Sachs report was also "likely" supporting the market.

Speculators' net longs in New York softs, Jan 15, (change on week)

Cotton: 24,944, (+2,017)

Cocoa: 22,822, (-1,574)

Raw sugar: 12,169, (-759)

Arabica coffee: -12,162, (+10,159)

Sources:, CFTC

Goldman said last week that while output from Brazil, the top arabica-producing country, would likely prove relatively high in 2013 for an off year, "dry weather in northern Brazil and pest/disease pressure in Central America remain a downside risk to production.

"Given still low inventories, we see limited further downside to prices," which should recover "modestly" this year, ending at 175 cents a pound, a little above the 168.00 cents a pound that New York futures are factoring in.

Arabica coffee prices have previously staged recoveries, in June and October, only for these to give way under pressure from fresh selling.

Rash of short-covering

The improvement in sentiment, evident in a recovery in futures of some 19% from a two-year low reached last month, was also evident in regulatory data late on Friday showing speculators slashing their net short exposure by more than 10,000 contracts in a week.

Speculators' net longs in grains and oilseeds, Jan 15, (change on week)

Chicago corn: 141,849, (+26,736)

Chicago soybeans: 79,436 (+16,184)

Chicago soymeal: 26,574, (-9,614)

Kansas wheat: 18,526, (+1,646)

Chicago wheat: -17,918, (-83)

Chicago soyoil: -32,495, (+4,521)

Sources:, CFTC

The rash of short-covering in New York futures and options, the most for at least a year, reduced managed money's net short position to 12,162 lots, a three-month low, data from the Commodity Futures Trading Commission showed.Speculators also turned more positive on New York cotton, and in Chicago reversed course on pessimistic position in corn and soybeans too.

The managed money net long in soybeans rose by 6,184 lots over the week, after three weeks of decline totalling some 36,000 lots.

In corn, speculators raised their net long for the first time in six weeks, by 26,736 lots, in a week which brought a surprise US Department of Agriculture downgrade to the forecast for domestic inventories of the grain as of the close of 2012-13.

'Increasingly unsettling the markets'

However, speculators made a small addition to their net short position in wheat, despite the USDA lowering their estimate for inventories in that grain too, and caution over the poor state of the US winter wheat crop.

"The long-discussed subject of the US drought is now increasingly unsettling the markets again, as there is still no end in sight to the dry conditions in the key growing areas of the US Great Plains, which therefore threatens to significantly reduce the 2013/14 season harvest," Commerzbank said.

"Investors, on the other hand, still remain sceptical about the development of prices - the latest CFTC market positioning data indicate that an overwhelming majority of investors assume prices will fall."

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