Dollar Strength Sparks Long Liquidation In Coffee Futures

July arabica coffee (KCN23) on Thursday closed down -2.95 (-1.59%), and July ICE robusta coffee (RMN23) closed down -88 (-3.55%).

Coffee prices Thursday moved lower, with robusta falling sharply to a 1-1/2 week low.  Thursday’s rally in the dollar index to a 1-week high sparked long liquidation in coffee futures.  Coffee prices were also weighed down by demand concerns after Thursday’s U.S. weekly jobless claims rose more than expected to a 1-1/2 year high, signaling a slowdown in the U.S. economy that may curb demand for commodities, including coffee.

A bearish factor for robusta is the increase in ICE-monitored robusta coffee inventories Wednesday to a 5-month high.

An excessive long position in robusta coffee futures could fuel long liquidation pressures after last Friday’s weekly Commitment of Traders (COT) data showed that funds boosted their net-long positions of robusta coffee futures by 544 in the week ending May 2 to a 16-month high of 40,342 long positions.

A negative factor for coffee is drier conditions in Brazil’s coffee fields that should accelerate the pace of the country’s coffee harvest.  Meteorologia reported Monday that Brazil’s Minas Gerais region received 0.4 mm of rain in the week ended May 7, or 6% of the historical average.  Minas Gerais accounts for about 30% of Brazil’s arabica crop.

Robusta coffee has carryover support from Tuesday when Vietnam’s General Department of Vietnam Customs reported Vietnam Apr coffee exports fell -22% m/m at 163,607 MT, and Jan-Apr coffee exports are down -5.5% y/y at 716,580 MT.  Vietnam is the world’s largest producer of robusta beans.

A bullish factor for arabica is the decline in ICE-monitored arabica coffee inventories seen over the past three months, with a 5-month low of 649,830 bags posted Wednesday.

Global coffee supplies have tightened after the International Coffee Organization (ICO) reported last Thursday that global 2022/23 coffee exports during Oct-Mar fell -6.4% y/y to 62.295 mln bags.

Reduced coffee supplies from Colombia are bullish for prices after the Colombia Coffee Growers Federation reported last Thursday that Colombian Apr coffee exports fell -15% y/y to 719,000 bags.  Colombia is the world’s second-largest arabica bean producer.

Robusta coffee has support from concern that heavy rain will reduce coffee yields in Indonesia, the world’s third-biggest robusta producer.  In addition, global demand for robusta has increased as roasters and consumers seek cheaper coffee options to cope with high inflation.

Arabica has support after Cecafe today reported that  Brazil’s Apr green coffee exports dropped -14% y/y to 2.39 mln bags.  By contrast, Honduran Mar coffee exports rose +14% y/y to 1.097 million bags.  Honduras is Central America’s biggest exporter of arabica beans.

Coffee prices also have support as the odds of an El Nino weather event increased, which could likely undercut global coffee production.  The U.S. Climate Prediction Center on April 13 raised the likelihood of an El Nino weather pattern emerging between August and October to 74% from 61% a month ago.  If that El Nino pattern occurs, it could bring heavy rains to Brazil and drought to India, negatively impacting coffee crop production.

Robusta has support on global supply concerns after coffee trader Volcafe forecasted the global 2023/24 robusta coffee market would see a record deficit of 5.6 mln bags.  In addition, the Association of Indonesian Coffee Exporters and Industries said that Indonesia would see its 2023 coffee production fall -20% y/y to 9.6 mln bags due to damage from excessive rainfall across its growing regions.

The International Coffee Organization (ICO) projects the global 2022/23 coffee market deficit will widen to -7.3 mln bags from a -7.1 mln bag deficit in 2021/22.  ICO projects that 2022/23 global coffee production will increase +1.7% y/y to 171.27 mln bags, and 2022/23 global coffee consumption will increase +1.7% y/y to 178.53 mln bags.

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.  Meanwhile, 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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