Coffee To Remain Most Affected By Droughts
BMI View: Coffee production is likely to be the most affected by the recent droughts in Brazil. Still, the surge in coffee prices has been exaggerated by a recent spike in net speculative positions, and we see volatility ahead and do not excluding a sell-off in prices in the short term. We believe sugar production will also be affected by the droughts but do not expect prices to break resistance at USc18.00-19.00/lb in the near term. For soybean, we believe fears have been exaggerated as impact on yields for the currently planted crop will be minimal.
We believe the coffee crop will be the most negatively affected by the recent droughts in Brazil. However, we highlight that the surge in coffee prices has been exaggerated by the recent spike in net speculative positions, and we see volatility ahead, not excluding a sell-off in prices in the short term. Managed money, a proxy for speculators, increased sharply in recent weeks, according to data from the Commodity Futures Trading Commission (CFTC). As a result of this turnaround, net long speculative positions moved from negative territory to a three-year high of 30,000. In contrast, commercial buying remained quite steady. As a result, we see potential for these positions to reverse rapidly if concerns over the Brazilian coffee crop ease.
Warmer-than-normal weather (and occasional droughts) in eastern Sao Paulo and Minas Gerais, the country's largest coffee producing state, could take 2014/15 coffee production lower, especially compared with the overly optimistic initial forecasts from local industry and government sources. Current estimates range from 50-52mn to 58-60mn bags for the coming 2014/15 season; we forecast coffee production in Brazil to increase only slightly in 2014/15 to reach 51.0mn bags. Even with our forecast at the lower end of current projections, we expect the global coffee surplus to expand to 9.0mn bags in 2014/15 and the stocks-to-use ratio to reach 30.7%, much higher than the five-year average of 22.2%. This confirms our view that the recent rally may be overstretched and that prices will be particularly volatile in the coming months.
|Coffee Specs Surging|
|Select Commodities - Net Long Speculative Positions|