To @shortdude’s point – “I think this way. ICE market is a bit disconnected from real trading. “, -This is a well-trodden point, during an oversupplied market when both the Financial incentives to be short are validated by bearish “real trading”, ie fundamentals. In this sense , I would argue that there really hasn’t been a disconnect at all between “Real” and Financial trading. In fact they have been in harmony. ShortDude - As you appropriately ask, how big have real deliveries been ? negligible. The past 24 months - Funds could short front month contracts because Brazil had a Fat Tail bumper crop to sell, and in the background, there was a very real possibility of Central America delivering its carry-out to the ICE US grading room in the event of any material rally on futures. It has been the perfect position for non-commercial shorts.
However, maybe this alignment deserves some reconsideration within the context of the next 12 months. Going forward - When funds sell U19 @ 100, will they really still be selling an oversupplied Z19 @ 104 ? What about the N 2020 @ 112 ? Is this still an acceptable Risk Adjusted Return of 12% ?
I believe that everyone in this forum agrees that 1) Arabica is entering a deficit, and 2) at current prices the Washed Mild producer Bloc (lead by Honduras) is not going to replenish certified stock inventories. Without the assumption of an active ICE US grading room the coming year, the value of the ICE US stocks become easier to model. Today there are 1.5M bags of Stocks that are discounted –a weighted average of 8.5 Cents/Lb. That is 91 cent washed mild coffee vs U19 today. Maybe that’s a short, maybe not. There are good time horizon dependent arguments on both sides. However, that same 1.5M bags, vs N20 is discounted a weighted average of -22 Cents/Lb. That is 89 cent washed mild coffee 1 year from now in a deficit year. With Fine Cups trading at premium to the board vs the current Term Structure, how much of that do we believe will actually be consumed, if not sold already ? My own personal view is all of it. For that reason and weighing the points mentioned in this thread, I do not believe that the market is a short at current levels. I also do not believe I am the only market analyst that sees this as these are publicly available figures.
Seeing the disconnect is not a matter of looking back, but of looking forward.
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