Marex Spectron curtailed hopes for arabica coffee prices, heralding the end of the net drawdown in in certified stocks which has been a key support for values – and foreseeing outperformance by robusta futures.
The commodities house – which in May forecast a rebound in arabica values from levels around 100 cents a pound – said that the recovery in futures to stand at 121.00 cents a pound on Tuesday, for December delivery, had gone far enough to factor in market dynamics.
“We no longer see ‘far value’ above market levels,” Marex said, in comments which follow cautious coffee price outlooks from ABN Amro and Rabobank too.
The assessment factored in increased expectations for coffee supplies, in the main on demand hits relating to the Covid-19 pandemic, with the forecast for the 2019-20 world production deficit reduced by 2.0m bags to 2.3m bags, and for the 2020-21 surplus raised by 1.1m bags to 3.1m bags.
The group said that its estimates “equate to 5.5m bags of lost demand growth” over the two seasons.
However, Marex stressed too the impact of a record Brazilian harvest, which it upgraded by 1.0m bags to 67.0m bags, in fostering a reversal in the decline in stocks certified for delivery against New York arabica futures – shrinkage which has been key to price gains.
Since in 2013 being listed as a deliverable origin against New York exchange stocks, “Brazil has never lived up to its potential”, with certified inventories actually accounted for in the main by Honduran beans.
“But this may be about to change.
“There is currently a window of opportunity in which semi-washed Brazils [arabica beans] are trading at tenderable parity to New York futures.”
In a “seismic shift”, semi-washed Brazilian beans could flow into exchange warehouses, and “replace Honduras as the basis of the futures contract”.
‘Largest decline since 2004’
Marex estimated at some 200,000 bags of Brazilian beans would be certified by the end of 2020, implying stocks of some 1.4m bags as of December, “of which about 15%” would stem from the South American country.
The draw in certified stocks was poised to “slow from September onwards as a pick-up in South American milds and Brazils (fine cup and semi-washed) plugs the continued gap left by Central America and Mexico”, a region where relatively high output costs have stemmed production.
That would follow what it turning out to be, in August, the biggest month in nearly 16 years for drawdowns from New York stocks.
“With six sessions left to go in August, [stocks] are down more than 253,000 bags (15.9% lower) for the month,” ADM Investor Services reported on Monday.
“This is already the largest outright monthly decline since December 2004 and the largest percentage monthly decline since October 1998.”
The broker added that with “the vast majority of ICE exchange coffee stocks located at warehouses in Antwerp, Hamburg and Bremen… their sharp August decline is a positive sign for European near-term demand prospects”.
Marex Spectron said that London robusta beans stocks – which have also been drawn down, as Covid-19 underpins demand for at-home coffee brands at a time when shipments from top producer Vietnam have slowed – could also see marked inflows of supplies from a bumper Brazilian harvest.
“We expect the spot situation to find nearby relief from the grading of conilons,” as Brazilian robusta is termed.
However, this trend will prove “short lived”, and herald a further draw down in exchange inventories.
Noting that more than three quarters of the certified robusta stocks “already incurs age penalties, and is becoming cheaper every month”, the market will become “increasingly prone” to strength in near-term futures contracts.
“As 2020-21 progresses, the robusta deficit will make itself felt.
“We expect to see a market prone to repeated backwardations and, with an arbitrage at 58 cents a pound, that is currently undervalued compared to arabica.”