1) The collapse of the 1 year carry in coffee. 2 Years ago the 1 year carry was 20 cents, a year ago it was over 10 cents today 4 cents! The importance of this is that the cost to see new developments in the market is very low. All things being equal it will cost you 400 points and not 2000 to sit for a year. It also gives the bears no cushion at what are historically low prices.
Perhaps even more importantly the spread is telling us that contrary to the fundamentals that we are hearing every day large crop poor demand, the market is trading a completely set of different factors. Coffee is a very expensive commodity to store, if the fundamentals are as negative as we are told this would be expressed in the spreads.
2) Warehouse stocks are dropping daily. We are fast approaching the 1.0 million mark levels not seen since the year 2000. Warehouse stocks are coffee stocks that are readily available to the consumer market. If shocks develop in the market they act as shock absorbers. They are necessary for the proper functioning of the market. In addition cash and futures must meet in the delivery month that this is not happening is another dislocation that must be corrected either by cash prices dropping or futures rising. The strong cash prices shows quite unexpectedly that pricing power has switched from buyers to producers.
3) This is a biennial coffee year in Brazil with reduced coffee production. The critical 60 day flowering period lies just ahead. What will be the impact of Covid in Central America and developing countries as far as limiting inputs that increase or support coffee yields.
4) The ICO has indicated that total coffee consumption was not severely impacted by Covid. If consumption resumes itís 2% growth. Deficit years are guaranteed.
5) The Brazil Real is strengthening against a weakening US dollar.
6) The strong deflationary sentiment is lifting from commodity markets
The fact that Covid was unable to force coffee to new lows and that we are approaching the breakout of a 3 year trading range has me positive in addition you get a lottery ticket on the successful flowering of what is already going to be a reduced coffee crop.
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