Liquidation of Funds weight on Prices

Liquidation of Funds weight on Prices



September 18, 2020

Favorable rain in Brazil is forecasted by Somar Meteorologia indicating that from September 21 on in Minas Gerais would be possible to see wide coffee flowering. The announcement caused considerable long liquidation by funds this week in the aftermath of brief modest price consolidation earlier. The early weather forecast was published claiming excessive dryness in Brazil including across the northeastern portion of Minas Gerais to undercut the coffee yields. The price on September 4 surged a eight months highs on concern in export level. The region has received as little as 10% of normal rain in the past month. Another market factor announced on September 15 is the green coffee inventories fall to -4.4%m/m and -6.6%y/y to 6.745m bags by Green Coffee Association. Coffee prices also have support on dwindling inventories. ICE-monitored arabica coffee inventories on September 15 dropped to a new 20-1/2 year low of 1.117 mln bags. Also, ICE-monitored robusta coffee inventories on Aug 28 fell to a 20-month low of 10,908 lots.

The recent up move in coffee prices has been supported by fund buying. September 11’s Commitment of Traders (COT) report showed that funds boosted their net-long positions in ICE arabica coffee futures by 5,866 contracts to a 4-year high of 48,450 contracts in the week ended Sep 8. Also, funds increased their net-long positions in ICE robusta coffee futures by 2,105 contracts to a 3-year high of 15,240 contracts in the week ended Sep 8. The extreme long coffee positions by funds, however, increases the threat of long liquidation pressure. Coffee prices also have support on data from ICO from Sep 1 that showed global 2019/20 coffee exports during Oct-Jul fell -5.3% y/y to 106.59 mln bags. The outlook for a smaller coffee crop in Vietnam, the world's largest robusta coffee producer, is boosting robusta prices. The CEO of Simexo Dak Lak, Vietnam's second-largest coffee exporter, forecast that Vietnam 2020/21 coffee production will fall -4.8% to 1.72 MMT, citing lower coffee yields from a drought this year during the coffee tree flowering period in Vietnam's Central Highlands, the country's biggest coffee-growing area. Robusta coffee is seeing support from tighter supplies after the General Department of Vietnam Customs reported Aug 30 that Vietnam's cumulative Vietnam Jan-Aug coffee exports fell -1.3% y/y to 1.161 MMT. The USDA's Foreign Agricultural Service (FAS) on June 10 forecasted that Vietnam's 2020/21 coffee production would fall -3.5% y/y to 30.2 mln bags. On the negative side, the International Coffee Organization (ICO) on Sep 1 projected a 2019/20 coffee surplus as the effects of the global COVID pandemic undercut coffee demand and boosted supplies. ICO on Tuesday said that it now sees a global 2019/20 coffee surplus of +952,000 bags versus its previous forecast for a global coffee deficit of -486,000 bags.

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