NY KC OUTLOOK: New Super Cycle Or Just A Blip
• Political instability
• C-19 impact on consumption
• Social distancing
• Long-term weakness in Brazilian Real
• Record production from Brazil’s 20/21 Arabica crop continues to flow
• Rebounding from a two decade low in October, certified stocks have surged
• Year-end Vietnam farmer selling will continue for a few more weeks
• Intermediary inventory adequate for now
• Increased rain in Brazil’s key coffee producing areas
• USDA’s latest 20/21 world forecast projects production consumption/surplus
of 10 million bags
• Net of the trade residual, USDA forecasts 5 million bag increase in stocks,
primarily Brazil & Nam
• While Brazil’s 21/22 Arabica crop could be down significantly, Robusta
production could be a record
• Excluding Brazil, the many origin by origin differentials remain generally firm
• Due to changing weather patterns, the lower crops in Nam, Brazil, Central
America & Colombia should provide underlying support
• Brazil’s lower biennial crop further reduced by drought, but the seasonal rains
• While most of the flowering stage damage may be irreversible, the
normalization of the Jan-Feb rain could still benefit Brazil’s crop
• C-19 Impact on Production
• Brazil’s upcoming Arabica crop estimates indicate a 25-50% decline
• The Brazilian 21/22 Arabica crop decline not currently priced in the market
• Brazil crop size & quality won’t be known until after the Jan-Feb period
• Non-retail type coffee consumption has picked up some of the lost retail
• Return of the retail coffee trade particularly important, but unknown
• Consistent with prior years, Brazil’s large 20/21 crop almost 80% sold.
• While there is no shortage today, the USDA’s record 20/21 stocks surplus could
turn into a record 21/22 deficit.
• After reaching new lows and the worst year in decades on meaningful volume,
the Brazilian Real may be bottoming
COMMODITIES AS AN ASSET CLASS: New Super Cycle Or A Blip
As an asset class, commodities have been out of favor for over a decade. Dreaming of a reflationary play, observers note the rapid recovery that followed the crude-driven early 2020 sell off
purge in commodities.
The rise in industrial commodities caused car manufacturers to raise prices and gold exceeded $2,000 for the first time. The price recovery was fueled by numerous dynamics, including:
• Supply Constraints (Weather, Logistics & Deferred Investing)
• Vaccine Rollouts Across Global Economies
• Big Spending Bills
• Loose Monetary Policies
• A Weaker Dollar
• Investor Demand
Some observers feel the rapid commodity price recovery is the start of a structural bull market while others don’t see the demand forces that fueled the commodity sensitive boom experienced by the first decade of the 21st century.
The specifics applicable to each commodity will always rule in the end, but the reflationary forces can’t be ignored. NY KC is interesting because in addition to the reflationary forces that have not yet entered the C market, the fundamentals are bullish on multiple fronts.
See the links below for more.
SHORT TERM FUTURES ANALYSIS WILL BE POSTED OVER THE WEEKEND
• The weekly line chart ascending triangle/flag formation is not only bullish,
but indicative of a looming upside breakout
• Brazil’s 21/22 Arabica shortfall won’t be fully felt until stocks decline, but
futures could react in advance, particularly if the Real strengthens &
weather problems persist
• While Brazil’s reduced crop outlook should provide underlying support, Macros
could produce C market headwinds.
• If they materialize, the emotional headwinds could offer additional buying
• Objectives are $1.45, $1.70 & $2.10
The weekly NY KC futures chart has broken out from a long term decline. The descending triangle/flag type formation on the bar chart is pointing to an upside breakout. The breakout should ultimately fill the gap at the $2.10 level. Looking at the same formation with a line chart, it becomes ascending.
Brazil’s 21/22 Arabica shortfall is not currently priced into the market. Nor are a potential bottom in the Brazilian Real, reflationary investment and the impact of climate change in the important producing countries, i.e.., Nam, Central America, Colombia and Brazil. These dynamics could break from the past and fuel multi-year bull markets. Indeed, commodities as an asset class have already recovered significantly
Rather than trying to micro manage and finesse the breakout, traders may wish to maintain a core position. The savvy could also use negative macro selling as a buying opportunity. When the bull is out of the barn, watch out. Could be sooner rather than later. Once the inelastic beast starts to run, the technical tools and the COT won’t be of much help. That is when riding the bull will require traders to hang on. The runaway will also once again validate emotion as a fundamental.
Underpriced futures, a much smaller Arabica crop, inelastic consumption, changing weather patterns, commodity favored macros, investor demand, emotion and a firming Brazilian Real could produce a runaway bull market that could remain overbought for an extended period.
LONG-TERM WEATHER PATTERNS COULD FUEL MULTI-YEAR BULL MARKETS
• 2020 was another hottest on record year
• Climate change remains controversial, but unfavorable long-term patterns in
Nam, Brazil, Honduras & Colombia are manifesting
• Trading the weather has always been problematic, but given today’s low coffee
prices, this dynamic could produce violent price swings way beyond the
21/22 crop year
While this analysis focuses on the Arabica market, Robusta could tighten as well. As noted by traders, there is no shortage of Robusta, but logistics could temporarily tighten the market. Like Latin American data, Asian data is always questionable. Nevertheless, Nam’s shipments appear lower than last year and old crop Conilon diffs seem firmer, the bulk of certified stocks. Brazil’s Robusta stocks are also tighter than Arabica.
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