AND THE MARKET HAS WOKEN UP!!!
Feb 27, 20201 - Marcelo Fraga Moreira*
We had the best week of the year for the price of coffee traded in the state of Sao Paulo and Minas Gerais (with the CEPA index closing Friday quoted at 746.50 R$ / bag and the month indicating an appreciation of +13.33%)! We had news of several businesses reported above 800 R$ / bag and cooperatives and trading companies entering the market trying to buy coffee for future delivery for September 22 and September 23 between 800-820 R$ / bag and between 835-850 R$ / bag respectively! For the quality coffee type "cereja descascado" still the payment of an additional premium between 60-70 R$/saca and for product with "UTZ/RA certificate" another premium between 10-15 R$/saca!
Also during the week, we finally had new reports being released confirming the 20/21 Brazilian crop failure! Rabobank updated their figures reducing the global surplus from +10 million bags to a global deficit of -2.6 million bags, down from 59 to 56.5 million bags. Olam International CEO Sunny Verghese gave an interview where he said that "given the bad weather that Brazil has had, we expect the 2021-22 and 2022-23 crops to be smaller earlier, which could result in a very sharp structural deficit in the Arabica market. We could see much higher Arabica prices."
And finally after a 15-day trip around Brazil renowned consultant Judith Ganes confirmed what several producers have been saying to the 4 corners for months: the Brazilian crop has broken (after visiting several farms and regions and interviewing dozens of producers). As a result, the projection for the next crop is still between 47-52 million bags! And here with our observation: "all going well, weather permitting" because the risk of frost has not even begun yet!
The funds have continued to buy, and in the last 2 weeks they have practically doubled their long position (from +22,000 to +41,298 contracts - which should be even more, as this number reflects last Tuesday's position and the market has continued to rise and with good volume being traded in the last 3 days of the week).
Speaking of quotations in New York, the week was the best of the year with the Sept-21 reaching the highest quotation of the year @ 143.80 cents per pound. The Sept-21 worked between the low and high between 130.45-143.80 cents per pound and closing Friday @ 141.10 cents per pound. The Sept-22 worked between minimum and maximum between 132.90-146.90 cents/lb and closed Friday @ 144.90 cents/lb.
The Real continued to be the star of the week, closing Friday @ 5.60 R$/US$ (even after 3 auctions held by the Central Bank to try to hold the currency) and the future dollar with maturity in July-22 was traded up to 5.75 R$/US$! The Real continued to depreciate strongly due to the international situation and, unfortunately, due to the internal Brazilian political/fiscal situation. On the international side, the market needed a reason to perform, and this reason appeared: the American stock markets worked at strong lows and the American interest rates for 5-10 years increased considerably (going from 0.90% per year to 1.40% per year). This movement of rising U.S. interest rates generates the "domino effect" where investors sell equity positions in emerging countries, the dollar appreciates against other currencies, and the funds come back to the United States to buy "safer" U.S. bonds with "more decent" yields.
This increase in U.S. interest rates has started to appear in the market since last week (when we talked here about the risks of "REFlation". The American government is still trying to approve the new plan to inject another 1.8 trillion dollars into the economy; vaccination continues to advance in both the United States/Canada and Europe; life is beginning to return to normal; and in the rich economies, with money left over, the population should be able to get around again, to go to bars, restaurants, coffee shops. And with this, analysts are again estimating the increase in prices, in the demand for products that had been held back for months. With this scenario we have forecasts for increased coffee consumption!
And so, the coffee market has finally woken up!
Producers with available coffee continue to wait for better prices! On the other hand, producers who have already sold and committed to future sales, and who will not be able to honor their commitments due to the drought/breaks in their crops, continue trying to buy product in the domestic market to honor their commitments and/or continue trying to renegotiate the delivery deadline for the 21/22 and 22/23 harvest with their input suppliers, cooperatives and trading companies... We will have more gasoline being added to the fire!
In Brazil, the index that measures inflation, the IGPM, has already increased by more than +30% in the last 12 months! Fertilizers more than 40%. Inflation in Brazil is out of control with prices of fuel, agricultural inputs and implements, and food going up almost every week! Now, what will be the real cost of production of a coffee crop in Brazil (considering a normal harvest)? 500/600/700 Reais per sack? Brazilian interest rates should increase in the next meeting of the Central Bank, and we should end the year with the Selic above 4.00% per year! Those who still have access to resources, "cheap" lines of credit, take advantage of it!
We remain bullish on the market for the short/medium term. For Sept-21 and Dec-21 the "sky could be the limit"!
We continue with our recommendation for those who are sold in futures and/or options that they zero out their positions or protect themselves by buying calls out of the money (which are still cheap). Buy the 170/180/200 cents per pound calls for Sept-21! Protect yourselves! Both growers and cooperatives! If we have frost in June/July-21 the Sept-21 expiration could explode and go over 200-300 cents per pound weight! With funds bought and room to buy even more, imagine if a frost, however light, were to occur! We will see the sellers running to "cover" and then, my dear readers, the perfect storm will be done! And remember: just as the market may shoot up 3-5-10,000 points it may give it all back in 2-3 days too!
For Sep-22, for those producers that still have product to sell, to fix, we continue recommending the purchase of the Put-Spread on Sep-22 strike +140 x -110 selling the Call Spread strike -170 x +200 (those who can wait to sell the Calls further ahead we suggest waiting).
This operation for the next crop 21/22, and even 22/23, guarantees a minimum price for the producer around 835 R$/per bag (since the Set-22 closes above 110 cents per pound) and a maximum sales price around 1,060 R$/per bag (since the Set-22 closes above 170 cents per pound). In case Set-22 trades and closes above the 170 cents/lb and closes above the 200 cents/lb, the producer will return to gains, and to "participate" of the market highs above the 200 cents/lb. If this scenario were to happen, the producer could "roll up" his Put-Spread purchase (i.e. sell the +140/-110 Put-Spread and buy a new +180 x -120 Put-Spread, for example, and sell a new Call-Spread, for example 250 x 300!
These structures for Sept-22 maturity have little liquidity in the market, so beware of the spreads that will be offered by the brokers/tradings that offer this type of operation/structure! Work the orders, do your math, and avoid the famous "alligator mouths"!
A great week to all!
Marcelo Fraga Moreira*
*Marcelo Fraga Moreira has been working in the agricultural commodities market for over 30 years and writes this weekly report on coffee as a contributor to Archer Consulting.
** Call" = call option
** Put" = put option
** Call-Spread" = simultaneous purchase and sale of 2 Call Options (buying the option with lower strike price and selling the option with higher strike price);
** Call-Spread Call-Sale" = simultaneous sale and purchase of 2 Call Options by selling the higher exercise price Option and purchasing the lower exercise price Option);
** Put-Spread Call" = simultaneous sale and call of 2 put options (selling the option with higher strike price and selling the option with lower strike price);
** Put-Spread Put-Sell" = simultaneous sale and purchase of 2 Put Options by selling the higher strike price Option and purchasing the lower strike price Option);
** CFTC" = Commodity Futures Trading Commission - an independent agency of the United States government that regulates the commodities futures and options markets;
Translated with www.DeepL.com/Translator
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