July 6, 2018 Coffee and Tea Market Report
The C market closed rather sharply higher on the day after posting an almost five year low in early trading. It was the biggest one-day trading range (7.6 cents) in over a year. There are a few ways that this is significant but perhaps the most important way to view it under the current circumstance is that the industry in general is backing away from the market. Producer selling out of Brazil has been a factor but the most aggressive pressure has once again come from funds and speculators. Their willingness to continue to short the market and add to their already large position has been more than a little surprising. Scale down industry buying has been thinning quickly on the way down as buyers can make less and less argument to justify the funds continuing to sell. So this thinning industry interest is adding to the increasing volatility the market is seeing. Today’s bounce was the product of smaller speculative short covering (with a weaker US Dollar helping). Why may this be significant? Volatility adds a question mark to the market that funds have not had to deal with in some time. The market has been slowly, steadily grinding lower for the last eighteen months with relatively low volatility. It has given large shorts little to worry about, hence their willingness to sell even into five year lows. Volatility will introduce some indecision into their mindset and that is what will lead them to stop selling and eventually buy back their short positions. Sorry, this is a very “non-coffee” explanation for today’s move and recent action but remember that coffee is historically one of the more volatile markets traded. It is also the second most traded commodity behind crude oil making it easy to put on large positions. For these reasons it draws in a lot of “non-coffee” investment dollars. So, the reasons above will likely be critical in eventually turning the trend we have all gotten so complacent watching.
Fundamentally, physical action remains extremely light. Differentials are very firm with the low C market prices. The summer months are historically quiet. The Brazil crop continues at a very good pace with favorable harvesting weather. Overall, the market is well supplied at a time of lower historical need. For a fundamental reason to turn the trend we are likely going to have to wait until the market starts looking at the next crop cycles around the end of the summer.
Technically today’s “key reversal” (new low, higher high than previous day) on the chart is made more significant by the fact that it was an almost five year low. Still, technical signals are mixed overall and it is too early to say if this bounce will amount to something significant. The coming days will be important. Overall though continue to see good value at these levels and still see buying scale down into new lows as the best bet overall.
Strong demand in this week’s tea auctions, crop yields appear to be down. Argentina’s season has officially closed. The remainder of processing is sorting and packing outstanding contracts. Demand improved in Kenya. Prices closely followed quality except with brokens & lower quality PDs which were lower than expected. Weather is cool and wet. Crops are low. Solid demand in Sri Lanka. While high growns saw a drop in pricing, most other types held firm. Spot showers interspersed with sunny periods cover the region along with persistent strong winds. Crops are low. In North India there was exceptional demand for 2nd flush Assams and flavor Darjeelings. The remainder of the teas also sold well with prices closely following quality. With it being monsoon season, the weather in unsurprisingly wet. Crops are at slightly lower levels. Though at slightly easier prices, South India demand was up this week. The weather is cool and wet. Crops are low.
For further insight and analysis on current coffee and tea market data, take a look at the weekly report from S&D’s commodities team.