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Into early March, the coffee market saw a dramatic rally to its highest price level since May 1997, yet many factors that are typically associated with an “overbought” market have not materialized. A Brazilian crop of 54.5 million bags in 2010/11 helped to spark a world production surplus of nearly 6 million bags, putting world ending stocks at 31.3 million bags with a stocks/usage ratio of 23.4%. The recent strength in the coffee market has come from a very tight supply of higher quality coffee from Colombia and a relatively tight global stocks situation. In addition, many traders have projected a stronger global demand trend and only a slight uptick in world production for the 2010/11 marketing year. 
Many traders also see a tightening world balance for 2011/12, as Brazil shifts to an “off-year” for its production cycle with an expected decline of 8-10 million bags from the previous season. If other world production and usage numbers stay unchanged for the coming year, the drop in Brazilian production would result in world ending stocks declining to around 23.3 million bags for 2011/12, with a stocks/usage ratio of 18%, at or near historic lows. However, Vietnam’s production may rise in 2011/12 as long as weather is favorable. And unless rain drenches coffee trees over the next several weeks, Colombia’s main crop should recover from disastrous production levels of the past few seasons. Colombia’s production hit a 35-year low of 8.1 million bags in 2009/10, but it is expected to reach 9 million bags for 2010/11 and possibly 10 million bags or more in 2011/12.
Monthly ICE exchange coffee warehouse stocks have declined for 28 consecutive months and have fallen to 1.576 million bags from 4.608 million bags just two years ago. This tightening process along with falling exchange stocks in London helped to drive coffee prices to their early March peak. With increased supply flow from Central America and three months of rising green coffee stocks in the US, we may see exchange stocks start to rebuild.
With the recent weakness in sugar and cocoa prices, there have been ideas that coffee will face a similar fate as the high prices of the past nine months encourage investment in coffee production. But coffee has a long production cycle, and it may take several years to rebuild output in key growing areas. There is a potential world a production deficit for the 2011/12 season due to Brazil’s coffee cycle and the quickly growing consumption trend in developing countries. Inventories have been drawn down over the past two years, and it will take time to rebuild them.
With central bank pumping liquidity into the world economy and uncertainty over the US Dollar, we cannot rule out bullish outside market influences for coffee during the coming year. Coffee’s “big picture” fundamental story could cause a resumption of this spring’s uptrend, with a peak possibly not occurring until the Brazilian harvest begins in early July. This also happens to be the coldest period of the year for Brazil’s main production area, and any frost warnings could make prices even more volatile. Once the market has made a significant correction of its current overbought condition, look for a resumption of the longer-term uptrend.
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Coffee: Increasing Demand and Tightening Stocks
by Research on April 11, 2011
Below is an excerpt from The Hightower Report’s most recent Newsletter. To receive access to this story, with trade strategies, and our daily coverage of 16 markets, visit futures-research.com for your free 2 week trial!
Into early March, the coffee market saw a dramatic rally to its highest price level since May 1997, yet many factors that are typically associated with an “overbought” market have not materialized. A Brazilian crop of 54.5 million bags in 2010/11 helped to spark a world production surplus of nearly 6 million bags, putting world ending stocks at 31.3 million bags with a stocks/usage ratio of 23.4%. The recent strength in the coffee market has come from a very tight supply of higher quality coffee from Colombia and a relatively tight global stocks situation. In addition, many traders have projected a stronger global demand trend and only a slight uptick in world production for the 2010/11 marketing year.
Many traders also see a tightening world balance for 2011/12, as Brazil shifts to an “off-year” for its production cycle with an expected decline of 8-10 million bags from the previous season. If other world production and usage numbers stay unchanged for the coming year, the drop in Brazilian production would result in world ending stocks declining to around 23.3 million bags for 2011/12, with a stocks/usage ratio of 18%, at or near historic lows. However, Vietnam’s production may rise in 2011/12 as long as weather is favorable. And unless rain drenches coffee trees over the next several weeks, Colombia’s main crop should recover from disastrous production levels of the past few seasons. Colombia’s production hit a 35-year low of 8.1 million bags in 2009/10, but it is expected to reach 9 million bags for 2010/11 and possibly 10 million bags or more in 2011/12.
With the recent weakness in sugar and cocoa prices, there have been ideas that coffee will face a similar fate as the high prices of the past nine months encourage investment in coffee production. But coffee has a long production cycle, and it may take several years to rebuild output in key growing areas. There is a potential world a production deficit for the 2011/12 season due to Brazil’s coffee cycle and the quickly growing consumption trend in developing countries. Inventories have been drawn down over the past two years, and it will take time to rebuild them.
With central bank pumping liquidity into the world economy and uncertainty over the US Dollar, we cannot rule out bullish outside market influences for coffee during the coming year. Coffee’s “big picture” fundamental story could cause a resumption of this spring’s uptrend, with a peak possibly not occurring until the Brazilian harvest begins in early July. This also happens to be the coldest period of the year for Brazil’s main production area, and any frost warnings could make prices even more volatile. Once the market has made a significant correction of its current overbought condition, look for a resumption of the longer-term uptrend.
Suggested Trading Strategies:
Trading strategies are available to our customers or trial users of our Research Center. Please sign-in or sign-up for your free trial
Tags: Coffee, Featured, Softs
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