Agri Commodity Markets Research
Agri Commodity Markets Research
Agri Commodity Markets Research Coffee Set to Boil?
USDA The coffee terminal markets have staged an impressive turnaround in the past weeks but in our view this is a short term move and prices will turn lower and continue the trend started in early May. The Robusta market is up 20% since the end of July on thin origin stocks and Arabica in NY is up 12% on strong technical signals and commercial buying. The move higher was supported by strong consumer interest at the recent lows and likely strong fund buying. However, the coming record harvest forecast in Vietnam and increased selling from growers in Brazil are expected to cause the price spike to be short‐lived. We expect end‐user buying to dry up near the USC 270/lb level for Arabicas and a better supply of washed Arabica from Central America and Colombia to temper the current price rally. Fundamental outlook is bullish with ending stocks and the stock to use ratio forecast to hit historic lows at the end of 2011/12 60
50
After hitting six month lows in early August the NY Arabica market has rallied on technical indicators and commercial buying
50%
325
45%
305
40%
285
35%
265
30%
245
180 170
20% 20
10
0
Ending Stocks
225
140
205
130
15%
185
10%
165
5%
145
0%
125 100 Mar 10 May 10 Jul 10 Sep 10 Nov 10 Jan 11 Mar 11 May 11 Jul 11
120
Stocks/Usage (RHS)
Source: Rabobank
150
110
"C" Front Month
100 Day Moving Average
200 DMA
Aggregate OI (RHS)
Source: Bloomberg, Rabobank
Fundamentally little has changed in the coffee markets to warrant the current price rises in the futures markets. The Brazilian Arabica harvest is 75% completed, and while frosts did occur during the season, the damage is expected to be light. It is an off year for Brazilian production, so output will be lower than last year, but forecasts have not been revised meaningfully lower. The forecasts for other regions have not been significantly altered either, and we expect production in Colombia to bounce back from the dismal 2010/11 season and Central American output to increase YOY. This is significant because these two areas are the main source for washed Arabica; a shortage of these sought‐after high‐quality beans was a major catalyst for the price rally that began in June 2010, and while supply will still be tight the improvement in availability should moderate price rallies. Even with improvements in Arabica production, the supply of Arabica beans is expected to be razor‐thin in the 2011/12 season due to the off cycle Brazilian crop. While the coffee market generally goes into deficit during the Brazilian off year, this season’s deficit is made more acute due to robust demand growth. The thin supply was expected, and industry buying ahead of the forecast shortages is likely the reason behind the 11‐month, 128% price increase in the front month contract in NY in 2010/11. The fundamentals of 2011/12 are likely priced into the market. While historically high prices are expected to remain the norm for the next two seasons due to thin supply, we see the industry as well‐covered and unlikely to buy at levels above USC 270/lb; we also expect selling by farmers in Brazil to pick up due to the higher prices, which should dampen the current rally. Luke Chandler Global Head
Keith Flury Senior Commodity Analyst
Erin FitzPatrick Commodity Analyst
+44 20 7664 9514 [email protected]
+44 20 7664 9676 [email protected]
+44 20 7664 9540 [email protected]
18 August 2011
Food & Agribusiness Research and Advisory
Thousand Contracts
25%
USc/lb
30
Percentage
Million 60kg bags
160 40
Agri Commodity Markets Research
The managed money net position on August 9 was short for the first time since late April 2010 when prices were 133 USc/lb
The structure of the current NY Arabica curve has a carry while the curve during the rally in 2010 was in full backwardation 275
30
200
270
10
250
195
-10
265
USc/lb
Thousand Contracts
205
300
50
-30 200 -50
190 260 185
-70 150
-90
255
180
-110 -130
250
100
175
Aug Dec Apr Aug Dec Apr Aug Dec Apr Aug Dec Apr Aug Dec Apr 06 06 07 07 07 08 08 08 09 09 09 10 10 10 11 Managed Money Net
Producer/User Net
"C" Front Month (RHS)
Source: CFTC, Rabobank
8/17/2011
11/5/2010 (RHS)
Source: Bloomberg, Rabobank
Buying support from commercial entities was likely a major impetus for the current rally. With commercials buying spurred at USc 234.85lb — the lowest front month price in NY since 25 January — speculators likely reversed their bearish selling. Since early May, large funds and small speculators have liquidated 55% of their long position and increased their short position 736%. The position swung from a net long of 36,754 contracts to a net short position of 2,288 contracts, which is the equivalent of selling into the market 11,068,221 bags, 8% of the forecast 2011/12 global production. Given the tight supply, commercials can be expected to buy dips, and the speculators to be quick to cover short positions. Elevated prices all along the NY coffee futures curve illustrate the expected tightness in the 2011/12 season and suggest that values may remain high for the coming two marketing years. The curve remains in a carry for the period from September 2011 to May 2012, suggesting that while front‐month prices may be rallying, the market actually expects sufficient supply until the spring of 2012, offering a carry to store beans. The curve shifts to backwardation from May 2012 as the market moves demand into the future, and encourages prompt selling. Given the very thin carryover stocks expected at the end of 2011/12, there is extreme upside risk if production is hampered by weather. This high risk is amplified by the short position of funds, who would likely quickly reverse tactics and buy if output was threaten. The risk is expected to result in a premium in the market for the coming seasons, this and the need to encourage farmers to boost output, are why we forecast high prices in the coming season. The 2011/12 fundamentals have been priced and as no production crisis has yet occurred the current rally seems premature to us, and we expect it to turn quickly. Robusta price is London have rallied on tight origin stocks, but a record harvest forecast in Vietnam will likely pressure prices
BMF v NY—The increasing arbitrage likely a result of Brazilian farmers selling on the BMF exchange as prices increase 325
2,600 2,400
33 28
275
23
2,000
225
18
USc/lb
USD/Tonne
2,200
1,800
13 175
1,600 1,400
8 3
125
1,200
-2
1,000 Jan 09
Apr 09
Jul 09
Oct 09
London Front Month
Jan 10
Apr 10
Jul 10
Oct 10
Jan 11
Apr 11
Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul 09 09 09 09 09 09 10 10 10 10 10 10 11 11 11 11
100 Day Moving Average Arbitrage (Rgt)
200 DMA
Source: USDA, Rabobank
-7
75
Jul 11
BMF Front Month
"C" Front Month
Source: Bloomberg, Rabobank
18 August 2011 2
Agri Commodity Markets Research
Agri Commodity Markets Research (ACMR) Luke Chandler Global Head +44 20 7664 9514 [email protected] Keith Flury Senior Commodity Analyst +44 20 7664 9676 [email protected] Erin FitzPatrick Commodity Analyst +44 20 7664 9540 [email protected] Rabobank Food & Agribusiness Research and Advisory www.rabotransact.com
Global Financial Markets Corporate sales contacts: ASIA―Brandon Ma +852 2103 2688 [email protected] AUSTRALIA―Terry Allom +61 2 8115 3103 [email protected] EUROPE―Arjan Veerhoek +31 30 216 9040 [email protected] BRAZIL―Sergio Nakashima +55 11 5503 7150 [email protected] US―Bruce King +1 212 808 6908 [email protected] US―Neil Williamson +1 212 808 6966 [email protected] MEXICO―Marco Garcia +52 55 52610029 [email protected] CHILE―Enzo Folch +56 2 8730332 [email protected]
This document is issued by Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A. incorporated in the Netherlands, trading as Rabobank International (“RI”). RI is authorised by De Nederlandsche Bank and by the Financial Services Authority and regulated by the Financial Services Authority for the conduct of UK business. This document is directed exclusively to Eligible Counterparties and Professional Clients. It is not directed at Retail Clients. This document does NOT purport to be an impartial assessment of the value or prospects of its subject matter and it must not be relied upon by any recipient as an impartial assessment of the value or prospects of its subject matter. No reliance may be placed by a recipient on any representations or statements outside this document (oral or written) by any person which state or imply (or may be reasonably viewed as stating or implying) any such impartiality. The information and opinions contained in this document have been compiled or arrived at from sources believed to be reliable, but no representation or warranty, express or implied, is made as to their accuracy, completeness or correctness. This document is for information purposes only and is not, and should not be construed as, an offer or a commitment by RI or any of its affiliates to enter into a transaction. The information contained in this document is not to be relied upon by the recipient as authoritative or taken in substitution for the exercise of judgement by any recipient. All opinions expressed in this document are subject to change without notice. Neither RI, nor other legal entities in the group to which it belongs accept any liability whatsoever for any direct or consequential loss howsoever arising from any use of this document or its contents or otherwise arising in connection therewith. Insofar as permitted by the Rules of the Financial Services Authority, RI or other legal entities in the group to which it belongs, their directors, officers and/or employees may have had or have a long or short position and may have traded or acted as principal in the securities described within this document, (or related investments). Further it may have or have had a relationship with or may provide or have provided corporate finance or other services to companies whose securities (or related investments) are described in this document. The distribution of this document in other jurisdictions may be restricted by law and recipients of this document should inform themselves about, and observe any such restrictions. This document may not be reproduced, distributed or published, in whole or in part, for any purpose, except with the prior written consent of RI. By accepting this document you agree to be bound by the foregoing restrictions. © Rabobank International London Branch, Thames Court, One Queenhithe, London EC4V 3RL +44 (0) 20 7809 3000
18 August 2011 3
Agri Commodity Markets Research Coffee Set to Boil?
USDA The coffee terminal markets have staged an impressive turnaround in the past weeks but in our view this is a short term move and prices will turn lower and continue the trend started in early May. The Robusta market is up 20% since the end of July on thin origin stocks and Arabica in NY is up 12% on strong technical signals and commercial buying. The move higher was supported by strong consumer interest at the recent lows and likely strong fund buying. However, the coming record harvest forecast in Vietnam and increased selling from growers in Brazil are expected to cause the price spike to be short‐lived. We expect end‐user buying to dry up near the USC 270/lb level for Arabicas and a better supply of washed Arabica from Central America and Colombia to temper the current price rally. Fundamental outlook is bullish with ending stocks and the stock to use ratio forecast to hit historic lows at the end of 2011/12 60
50
After hitting six month lows in early August the NY Arabica market has rallied on technical indicators and commercial buying
50%
325
45%
305
40%
285
35%
265
30%
245
180 170
20% 20
10
0
Ending Stocks
225
140
205
130
15%
185
10%
165
5%
145
0%
125 100 Mar 10 May 10 Jul 10 Sep 10 Nov 10 Jan 11 Mar 11 May 11 Jul 11
120
Stocks/Usage (RHS)
Source: Rabobank
150
110
"C" Front Month
100 Day Moving Average
200 DMA
Aggregate OI (RHS)
Source: Bloomberg, Rabobank
Fundamentally little has changed in the coffee markets to warrant the current price rises in the futures markets. The Brazilian Arabica harvest is 75% completed, and while frosts did occur during the season, the damage is expected to be light. It is an off year for Brazilian production, so output will be lower than last year, but forecasts have not been revised meaningfully lower. The forecasts for other regions have not been significantly altered either, and we expect production in Colombia to bounce back from the dismal 2010/11 season and Central American output to increase YOY. This is significant because these two areas are the main source for washed Arabica; a shortage of these sought‐after high‐quality beans was a major catalyst for the price rally that began in June 2010, and while supply will still be tight the improvement in availability should moderate price rallies. Even with improvements in Arabica production, the supply of Arabica beans is expected to be razor‐thin in the 2011/12 season due to the off cycle Brazilian crop. While the coffee market generally goes into deficit during the Brazilian off year, this season’s deficit is made more acute due to robust demand growth. The thin supply was expected, and industry buying ahead of the forecast shortages is likely the reason behind the 11‐month, 128% price increase in the front month contract in NY in 2010/11. The fundamentals of 2011/12 are likely priced into the market. While historically high prices are expected to remain the norm for the next two seasons due to thin supply, we see the industry as well‐covered and unlikely to buy at levels above USC 270/lb; we also expect selling by farmers in Brazil to pick up due to the higher prices, which should dampen the current rally. Luke Chandler Global Head
Keith Flury Senior Commodity Analyst
Erin FitzPatrick Commodity Analyst
+44 20 7664 9514 [email protected]
+44 20 7664 9676 [email protected]
+44 20 7664 9540 [email protected]
18 August 2011
Food & Agribusiness Research and Advisory
Thousand Contracts
25%
USc/lb
30
Percentage
Million 60kg bags
160 40
Agri Commodity Markets Research
The managed money net position on August 9 was short for the first time since late April 2010 when prices were 133 USc/lb
The structure of the current NY Arabica curve has a carry while the curve during the rally in 2010 was in full backwardation 275
30
200
270
10
250
195
-10
265
USc/lb
Thousand Contracts
205
300
50
-30 200 -50
190 260 185
-70 150
-90
255
180
-110 -130
250
100
175
Aug Dec Apr Aug Dec Apr Aug Dec Apr Aug Dec Apr Aug Dec Apr 06 06 07 07 07 08 08 08 09 09 09 10 10 10 11 Managed Money Net
Producer/User Net
"C" Front Month (RHS)
Source: CFTC, Rabobank
8/17/2011
11/5/2010 (RHS)
Source: Bloomberg, Rabobank
Buying support from commercial entities was likely a major impetus for the current rally. With commercials buying spurred at USc 234.85lb — the lowest front month price in NY since 25 January — speculators likely reversed their bearish selling. Since early May, large funds and small speculators have liquidated 55% of their long position and increased their short position 736%. The position swung from a net long of 36,754 contracts to a net short position of 2,288 contracts, which is the equivalent of selling into the market 11,068,221 bags, 8% of the forecast 2011/12 global production. Given the tight supply, commercials can be expected to buy dips, and the speculators to be quick to cover short positions. Elevated prices all along the NY coffee futures curve illustrate the expected tightness in the 2011/12 season and suggest that values may remain high for the coming two marketing years. The curve remains in a carry for the period from September 2011 to May 2012, suggesting that while front‐month prices may be rallying, the market actually expects sufficient supply until the spring of 2012, offering a carry to store beans. The curve shifts to backwardation from May 2012 as the market moves demand into the future, and encourages prompt selling. Given the very thin carryover stocks expected at the end of 2011/12, there is extreme upside risk if production is hampered by weather. This high risk is amplified by the short position of funds, who would likely quickly reverse tactics and buy if output was threaten. The risk is expected to result in a premium in the market for the coming seasons, this and the need to encourage farmers to boost output, are why we forecast high prices in the coming season. The 2011/12 fundamentals have been priced and as no production crisis has yet occurred the current rally seems premature to us, and we expect it to turn quickly. Robusta price is London have rallied on tight origin stocks, but a record harvest forecast in Vietnam will likely pressure prices
BMF v NY—The increasing arbitrage likely a result of Brazilian farmers selling on the BMF exchange as prices increase 325
2,600 2,400
33 28
275
23
2,000
225
18
USc/lb
USD/Tonne
2,200
1,800
13 175
1,600 1,400
8 3
125
1,200
-2
1,000 Jan 09
Apr 09
Jul 09
Oct 09
London Front Month
Jan 10
Apr 10
Jul 10
Oct 10
Jan 11
Apr 11
Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul 09 09 09 09 09 09 10 10 10 10 10 10 11 11 11 11
100 Day Moving Average Arbitrage (Rgt)
200 DMA
Source: USDA, Rabobank
-7
75
Jul 11
BMF Front Month
"C" Front Month
Source: Bloomberg, Rabobank
18 August 2011 2
Agri Commodity Markets Research
Agri Commodity Markets Research (ACMR) Luke Chandler Global Head +44 20 7664 9514 [email protected] Keith Flury Senior Commodity Analyst +44 20 7664 9676 [email protected] Erin FitzPatrick Commodity Analyst +44 20 7664 9540 [email protected] Rabobank Food & Agribusiness Research and Advisory www.rabotransact.com
Global Financial Markets Corporate sales contacts: ASIA―Brandon Ma +852 2103 2688 [email protected] AUSTRALIA―Terry Allom +61 2 8115 3103 [email protected] EUROPE―Arjan Veerhoek +31 30 216 9040 [email protected] BRAZIL―Sergio Nakashima +55 11 5503 7150 [email protected] US―Bruce King +1 212 808 6908 [email protected] US―Neil Williamson +1 212 808 6966 [email protected] MEXICO―Marco Garcia +52 55 52610029 [email protected] CHILE―Enzo Folch +56 2 8730332 [email protected]
This document is issued by Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A. incorporated in the Netherlands, trading as Rabobank International (“RI”). RI is authorised by De Nederlandsche Bank and by the Financial Services Authority and regulated by the Financial Services Authority for the conduct of UK business. This document is directed exclusively to Eligible Counterparties and Professional Clients. It is not directed at Retail Clients. This document does NOT purport to be an impartial assessment of the value or prospects of its subject matter and it must not be relied upon by any recipient as an impartial assessment of the value or prospects of its subject matter. No reliance may be placed by a recipient on any representations or statements outside this document (oral or written) by any person which state or imply (or may be reasonably viewed as stating or implying) any such impartiality. The information and opinions contained in this document have been compiled or arrived at from sources believed to be reliable, but no representation or warranty, express or implied, is made as to their accuracy, completeness or correctness. This document is for information purposes only and is not, and should not be construed as, an offer or a commitment by RI or any of its affiliates to enter into a transaction. The information contained in this document is not to be relied upon by the recipient as authoritative or taken in substitution for the exercise of judgement by any recipient. All opinions expressed in this document are subject to change without notice. Neither RI, nor other legal entities in the group to which it belongs accept any liability whatsoever for any direct or consequential loss howsoever arising from any use of this document or its contents or otherwise arising in connection therewith. Insofar as permitted by the Rules of the Financial Services Authority, RI or other legal entities in the group to which it belongs, their directors, officers and/or employees may have had or have a long or short position and may have traded or acted as principal in the securities described within this document, (or related investments). Further it may have or have had a relationship with or may provide or have provided corporate finance or other services to companies whose securities (or related investments) are described in this document. The distribution of this document in other jurisdictions may be restricted by law and recipients of this document should inform themselves about, and observe any such restrictions. This document may not be reproduced, distributed or published, in whole or in part, for any purpose, except with the prior written consent of RI. By accepting this document you agree to be bound by the foregoing restrictions. © Rabobank International London Branch, Thames Court, One Queenhithe, London EC4V 3RL +44 (0) 20 7809 3000
18 August 2011 3
