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ANALYSIS: Coffee futures' premature rush of blood


On Tuesday, the May arabica coffee future contract on the ICE exchange closed 5.7% higher, at 122.20 cents per pound, its highest in seven weeks.


In London, the May robusta coffee future settled 3.1% higher, at $1,331 per tonne.


The surge came on the back of what seemed like a bullish report from the International Coffee Organization (ICO). This reported that global coffee exports in January fell by almost 8% in January, against the same month in 2019.


This is likely to be a short-lived burst


The ICO reported that the January decline was 6.5m bags of arabica, down almost 5% from the same month last year, while the decline in robusta exports was 12%, to 3.76m bags.


The rush of blood ignores the fact that market consensus expectations are for a huge Brazilian crop this year, which could match or exceed the record set in 2018-19 of 62m bags.


The ICO also reduced its estimate of the global deficit for this season, from 626,000 bags to 480,000 bags, citing the Covid-19 viral outbreak as a demand-side risk.


The next season probably will be tighter


The difficulty in assessing the true state of the market is that south America’s coffee producers (mainly arabica) and (largely robusta) exporters in Vietnam have become cannier over recent years.


They are well-adjusted to observing the futures’ markets; they keep close tabs on prices. When prices rise, they have a well-established inclination to hold onto stocks in the hope and/or expectation that they may go even higher.


Thus the ICO’s comment that "concern has been growing about the immediate availability of quality arabica" requires a degree of scepticism. A price fall could see greater export flows.


Yet perhaps investors are looking far ahead, to the possible market situation in 2021-22, which will be an ’off’ year in the biennial Brazilian arabica harvest. It is far too early reliably to forecast a serious global deficit in 2021-22, but investors may be positioning for precisely that eventuality.


The Covid-19 virus has thrown another spanner in the works, making demand estimates - could bigger stocks mount up for 2019-20? - even more tricky than usual.

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