BLUE LINE = BRLUSD

The market was volatile in the thin outright volume as it came close to 210.00 three times and just penetrated 200.00 three times, ending on a steady note and just about unchanged. And so, the COT shows only slight net changes as two way activity took place. In RC, however, where Algos don’t participate, imo, there was selling by all groups into the hands of commercials. The remainder of the week prices emphatically broke through 210.00, twice, and equally emphatically broke through 200.00. On Friday the weakness in the market was fairly great and ended near the lows of the day, in spite of the steady Real, but remained above 200.00.

The extended chart shows the consolidation that has been taking place in the market which began shortly after having reached a high of around 215.00. Since then, prices have generally stayed between 200.00 and 210.00 with some penetration on both sides. This rangebound activity for the last month or so indicates an indecisive market that is waiting for new clarification of the state of the coffee supply and production for ‘22’23. The thin volume shows an outright KC market that lacks participation, and where commercials are prepared to fade the market on either side as they hedge their delta. Origin has shown little interest in selling forwards even with a consistently low Real. The consumer side has also had no evident interest at higher levels, not yet. The market may still be consolidating but we now have some developments.

Option expiration for Z will be next Friday and as we look at its OI, there is an overwhelming call side compared to the put side. The call/put ratio at 202.50 strike is 10:1 at last look. Of course, many of the calls are hedged. How many? Another development is the release of production projections. Although, as Orb states, that ECOM is traditionally high on production estimates, they were right on the money in ‘20’21 at 70m bags. High or low, the coffee community reacts to estimates accordingly regardless of what we at the forum think the numbers should be.

Spreads, which greatly dominate the volume, have essentially reacted to the direction of the outright market. Justification for buying spreads are the threat of transportation glitches, reduction of warehouse stocks and a shortage of supply. The bears however would argue that transportation glitches are transitory, warehouse stocks activity may or may not be relevant and the shortage of supply is not yet defined. And now we have estimates showing production in the low to mid 60m and a managed money spread position of 46k, which is probably mostly long. The ZH is of course weak. Specs are rolling forward and there are no immediate shortages, as the spread reflects. Nevertheless the perception and threat of low supply availability remains primary.

For now the fate of the market will be guided by option expiration and the release of additional reports.