January 10, 2020 Coffee and Tea Market Report
The C market continued to retrace recent gains this week as prices fell 6% on modest volume. Prices saw a six-week low as speculators liquidated long positions. The market is amid the annual index fund rebalancing and this is putting light pressure on the market. Smaller to mid-sized speculators saw profits erode quickly and the exchange raised margin requirements, so they are exiting longs. Large funds appear to be in a holding pattern at this point, sitting on a small long position. They had been the driving force behind the rally over recent weeks as they reversed form short to long. The industry in general is not engaged in the market in a big way. Origin selling has been seen on the way down from the December highs. Industry buying has been light as low prices saw many extend cover over recent months, so there has been no real need to pay up so far. Physical business remains somewhat erratic. Differentials have been a mixed bag. Both Brazil and Colombia saw prices ease slightly. Central American differentials conversely continued to firm. As crops flow it is becoming more obvious that production is down roughly 10-15% from last year across the region. Forward business remains light overall as the market looks for balance. The macro picture has provided little direct influence over recent weeks.
Technically the market is a bit oversold near term and actually a few buy signals were generated today with the small uptick. Overall the pullback has put the market within range of standard retracement targets and some support is starting to materialize. Bigger picture while a broad range remains likely it is becoming more likely that the market will trade in the upper end of that range for a time, likely through mid-year. So, while prices back toward a dollar may be seen again later value near term is likely represented by prices in the low 120s. Would look to extend coverage modestly if such levels can be seen. Very short term the current decline could extend another 5-8 cents, but a five-cent bounce seems more likely. Volatility will remain fairly high most likely as well.
With some areas still feeling the effects of the holiday, the tea auctions across the world have come back to life for the new year. There was good interest in Kenya this week but there is some hesitation with a large auction in the coming weeks. This week the 178,000 packages up for auction saw good demand with an outlot figure of 10.91%. This auction quantity will seem small compared to the week 5 sale in Mombasa with a staggering 213,000 package auction set for week 5. Sri Lanka also started this year strong with good demand and rising prices. Prices will probably start to ease as the auctions grow. Next week there will be around 7.63m kgs up for auction. Indian growing regions have weathered the storm of unrest and now the employees have returned to work. Quality is good and the pricing is improving little by little. Argentina is having patchy weather and the crop production has decreased between 5-10% so far this season depending on the area. Low prices are also a stressful factor to many growers in the region. Indonesia has experienced the worst rainfall in a decade. More than 36,000 people have been displaced by flooding and the death toll has risen to 66. Our thoughts go out to all those affected in the region.
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.