In Commodity News 09/06/2015
Hedge funds started pulling out of their bearish coffee bets just in time to escape being squeezed by the biggest rally in 11 weeks.
Investors who were the most negative on prices since December 2013, retreated from their net-short position before futures posted seven straight gains through June 4. Signs that supplies won’t be as plentiful as some analysts had expected sparked a 9 percent rebound from this year’s low in late May.
While rains in the first quarter spurred speculation that Brazil’s trees would recover from last year’s drought, farmers found smaller-than-expected beans when the harvest started in May. Analysts have started cutting their estimates for output in the country, the biggest grower and exporter, exchange-monitored stockpiles are near the lowest level since September 2012, and exports are declining from Costa Rica and Peru.
“People are beginning to realize that all the supply issues have not disappeared,” said Donald Selkin, who helps manage about $3 billion as chief market strategist at National Securities Corp. in New York. “While we may not see a big jump in prices, it looks like the market has bottomed, and going forward may see some strength.”
The net-short position in arabica coffee was 15,420 futures and options contracts in the week ended June 2, U.S. Commodity Futures Trading Commission data show. That compares with 18,682 a week earlier, which was the most bearish since Dec. 10, 2013.
Prices Rally
Arabica coffee rose 7.1 percent last week to $1.351 a pound on ICE Futures U.S., the biggest gain since March 20. The Bloomberg Commodity Index of 22 raw materials fell 0.7 percent, while the MSCI All-Country World Index of equities dropped 1.2 percent, and was little changed on Monday.
Brazil’s coffee trees are struggling to rebound from the 2014 drought, the worst in decades. Another dry spell and high temperatures earlier this year also hurt plant development, according to Lucio Dias, the commercial director of Cooxupe, the nation’s biggest grower-cooperative. The first batches of beans that have been harvested are signaling lower crop quality, he wrote in an e-mail June 1 from Guaxupe, Minas Gerais.
The rains that farmers had been waiting for are also now creating problems. In some growing regions, showers were excessive and hurt crop quality, Dias said. The rain is making it harder for farmers to dry out cherries that contain the coffee beans, according to Daniel Greenstein, a meteorologist with Speedwell Weather in Charleston, South Carolina.
Global Deficit
Production in Brazil will probably drop 4.1 percent in the harvest that runs through September from a year earlier, Neumann Kaffee Gruppe said in a report last week. That will help spur a global supply shortfall of 3.3 million bags, each weighing 60 kilograms, or 132 pounds.
The deficit will still shrink compared with a year earlier, Neumann forecasts. And not everyone expects a shortage. Societe Generale SA on June 3 predicted a surplus of 905,000 bags, reversing its outlook from a previous estimate of a shortfall of 2.2 million bags. Improving output in Colombia, the second-biggest grower of arabica beans, will buoy global production, analysts including Chris Narayanan said in the report.
Coffee prices have tumbled 19 percent this year, the biggest loss among the 22 components of the Bloomberg Commodity Index. Showers in February and March brightened the outlook for production, and the real’s retreat against the dollar has spurred Brazil’s farmers to increase exports priced in dollars.
‘Great Extent’
“Concerns about next year’s output have been alleviated to a great extent,” said Veronica Willis, the St. Louis-based analytic consultant at Wells Fargo Investment Institute, which oversees $1.6 trillion. “The rally that we are seeing now may be short-lived.”
Supplies from Peru, the fifth-biggest arabica grower, tumbled 64 percent in the first four months of the year. Ethiopia is the third-biggest producer, followed by Honduras.
Gains in demand will also tighten supplies, with global consumption forecast by the U.S. Department of Agriculture to climb 3.7 percent this year, a fourth consecutive increase.
“Even though we got very good rains this year, the problem is that the crop is still feeling the effect of last year’s drought,” said Carlos Mera Arzeno, an analyst at Rabobank International in London. “The damage has been done.”
