Physical coffee market surges with ICE rally and dollar record

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The escalation of arabica prices on ICE Futures US supported Brazilian prices and reinforces the good moment for sellers. The May/20 position, which exchanged hands at 122 cents per pound, closed this Wednesday at 118.40 cents. The contract sustained good advances, which were motivated by a positive sequence of factors, which started with the correction of exaggerations, amid nervousness caused by coronavirus. A more positive technical reading, with the breaching of important resistances, ended up stimulating new purchases and helped give intensity to the bullish movement.

 Gains were boosted by the entry of funds on the buying side. The lack of availability again generates fear about the supply of quality coffee, especially milds. The lack of this description can affect the volume of coffee certified on the commodities exchange, which made funds anticipate and take a more aggressive stance (protection). Funds in the CFTC’s latest report, on February 25, already sustained a net long portfolio.

It is natural to compare this situation with what happened late last year, when the NY exchange reached 140 cents. The similarity is that, both last year and now, the high came after the market tested the psychological benchmark of 100 cents. Moreover, in both cases, the high was initially based on corrections of exaggeration of the losses after testing the psychological level of 100 cents. The difference is that the economic environment is more dangerous now – which can sustain such an intense rally as it did before. In any case, it is good to keep an eye on funds, as they were the ones who gave intensity to the market to go where it did before.

Another point is that in both moments the projection for Brazil’s 2020 record crop cast shadow over market gains. However, since December some more production stages have been overcome, and the numbers remain very optimistic. Besides, the dollar is surprisingly much higher and more dangerous than at the end of last year (above BRL 4.50). In any case, even if the ICE does not repeat the previous year’s gains, it is favoring sellers again.

Firmer and more agitated physical market. Again the coffee market is experiencing a peculiar moment, with the dollar testing new historical highs while the ICE goes through a strong upward correction. An extremely favorable combination for coffee sellers. Good cup with 15% of defects from southern Minas Gerais is trading between BRL 545 and 550 per bag, well above the same period last year and also above the deflated 5-year average. Indeed, coffee enters an area favorable to sellers.

The price for forward business with the new crop is between BRL 550 and 560 for Sep/20 in the south of Minas. The idea for Sep/21 ranges from BRL 590 to 600, depending on description. With that, the market is back to the levels seen at the end of last year, giving sellers a new chance, especially for new crop forward business.

In Cerrado of Minas, the finest cups are trading between BRL 570 and 575 per bag in early March, also above the 5-year average. The finest cups must remain valued in the physical market, at least until the next season arrival, due to the scarcity of product. The indications for forward business in Cerrado range from BRL 560 to 570 for Sep/20 and BRL 600 to 610 for Sep/21. Of course, the interest of producers has increased, boosting market liquidity.

Weaker cups do not follow the bullish strength of Group 1 coffees. Arabica Rio with 20% of defects in Zona da Mata de Minas is around BRL 395 a bag in early March. With that, the current price of Rio coffee already exceeds the level of the same period last year. However, it is still below the 5-year average for the period. A greater supply of weak arabica and strong competition with conillon in the domestic market limit the price high of these descriptions.

Conillon also gained value, with type 7 from Espírito Santo ranging from BRL 312 to 315 a bag in Vitória. The increase is important, not only for raising prices above the same period last year, but also for preparing the market for the 2020 crop that is approaching. By the end of March, new conillon begins to appear on the market, actually earlier than normal, with its supply growing effectively from April. The expectation is for a large conillon production. Even with price improvement, conillon from Espírito Santo remains below average for the period.