Coffee Closes Moderately Higher On Short Covering And Technical Buying

March arabica coffee (KCH23) on Friday closed up +2.75 (+1.65%), and Mar ICE robusta coffee (RMH23) closed up +59 (+2.96%).

Coffee Mar '23 (KCH23)
Coffee Mar ’23 (KCH23)

Coffee prices Friday extended their 2-week long rally, with arabica posting a 3-1/2 week high and robusta posting a 3-month high.  Arabica coffee on Friday garnered early support from a rally in the Brazilian real (^USDBRL) to a 2-1/2 month high against the dollar, although the real later Friday gave up its gains and turned lower.  The stronger real discourages export selling from Brazil’s coffee producers.  Gains in arabica accelerated Friday after prices climbed above their 50-day moving average, which sparked technical buying.

Robusta also found support Friday on shrinking supplies after ICE-monitored robusta coffee inventories fell to 6,219 lots, the fewest since contract rules changed in 2016.

An excessive short position in arabica coffee futures could fuel short covering pressures after last Friday’s weekly Commitment of Traders (COT) report showed funds boosted their net-short arabica coffee positions by 10,308 the week ended January 17 to a 3-year high of 40,480.

A bullish factor for coffee prices was last Monday’s report from Cecafe that showed Brazil’s 2022 green coffee exports fell -2.7% y/y to 35.6 mln bags, the lowest in 4 years.

Robusta also has support after coffee trader Volcafe forecasted that the global 2023/24 robusta coffee market would see a record deficit of 5.6 mln bags as Indonesia, the world’s third-largest robusta producer is expected to see its 2023/24 robusta coffee production fall to 9.1 mln bags, the smallest robusta crop in 10 years due to damage from excessive rainfall across its growing regions.

An easing of dry conditions in Brazil may boost coffee yields and is bearish for prices.  Somar Meteorologia reported Monday that Brazil’s Minas Gerais region received 71.9 mm of rain last week, or 170% of the historical average.  Minas Gerais accounts for about 30% of Brazil’s arabica crop.

Abundant arabica coffee supplies are negative for prices.  ICE arabica coffee inventories have risen steadily since falling to a 23-year low of 382,695 bags on November 3 and posted a 6-3/4 month high of 870,7224 bags Thursday.  Also, Conab last Thursday forecasted the 2023 Brazil arabica crop would rise +14.4% to 37.4 mln bags.

Increased coffee exports from Vietnam, the largest robusta producer, are bearish for robusta prices after the General Statistics Office of Vietnam reported on January 9 that Vietnam’s 2022 coffee exports were seen up +13.8% y/y at 1.8 MMT.

On the bullish side for coffee prices was the January 4 report from the Colombia Coffee Growers Federation that showed Colombia’s 2022 coffee exports fell -8% y/y to 11.1 mln bags.  Colombia is the world’s second-biggest producer of arabica coffee beans.

On the bearish side, U.S. green coffee inventories are plentiful after the Green Coffee Association last Tuesday reported that U.S. Dec green coffee inventories rose +9.3% y/y to 6.38 mln bags.  Also, Conab on December 15 raised its 2022 Brazil coffee production estimate to 50.9 mln bags from a 50.4 mln bag estimate in Sep, up +6.7% y/y.

The USDA, in its bi-annual report released on December 23, cut its global 2022/23 coffee production estimate by -1.3% to 172.8 mln bags from a June estimate of 175.0 mln bags.  In addition, the USDA cut its 2022/23 global coffee ending stocks estimate by -1.7% to 34.1 mln bags from a June estimate of 34.7 mln bags.

The International Coffee Organization (ICO) reported on December 2 that global coffee exports in Oct fell -1.9% y/y to 9.87 mln bags.

In a bullish factor, the USDA’s Foreign Agriculture Service (FAS) on November 22 cut its Brazil 2022/23 coffee production forecast by -2.6% to 62.6 mln bags from a prior estimate of 64.3 mln bags.  This year was supposed to be the higher-yielding year of Brazil’s biennial coffee crop, but coffee output this year was slashed by drought.

Source: Rich Asplund (Barchart)

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