coffee futures news

coffee futures news

May 17th, 2016

Since drought concerns first emerged in February this year, London robusta coffee prices have rallied by over 25%.

Prices are currently trading at an eight-month high of $1679 per tonne, as drought fears have cut estimates of the 2016/17 crop production from top robusta producing countries including Vietnam, Brazil, Indonesia and, more recently, India.

Coffee Futures: Eyes on skies

With the rainfall season approaching in Vietnam, the country’s Meteorology and Hydrology Department’s (GDMH) in its May statement forecast 20 – 40% lower rainfall in the main producing areas of the South and the Central Highlands.

Current rainfall has been scattered and this will lend little support to production, “so drought and water conditions won’t improve much” in the short-term, according to GDMH.

Despite drought fears, Vietnam has been running a strong exports program, with volumes well above the five-year average of 139,000 tonnes. April exports were up 3% month on month, at 185,962 tonnes, according to the Customs department.

Though elevated exports may be due to Vietnam running down its hefty carryover stocks from the previous season’s record crop.

Since the start of March, physical prices in Daklak, the country’s top growing province, have rallied by around 20% to 36,500 VND per kg.

Despite the price rise, demand for Vietnamese beans is likely to continue as it remains relatively attractive compared to alternate supplies from Brazil and Indonesia, which are also suffering from drought.

Coffee: Suffering production may limit exports

Although total Brazilian coffee exports are expected to be higher this year, the increase will be comprised primarily by Arabica beans. Meanwhile, the current robusta harvest is suffering due to a severe drought in Espirito Santo, Brazil’s key robusta producing state.

In Indonesia, the world’s third largest robusta producer, dry weather due to El Nino is expected to reduce output by 10% according to the latest Bloomberg survey. This alongside increasing domestic consumption is expected to further limit exports in 2016/2017.

The ICO in its April monthly report estimated Indonesian coffee exports to come in at “6.1 million bags, the lowest since 2010/2011″.

Another country struggling with drought is India, which is the sixth largest coffee producer globally, of primarily robusta beans. The national coffee board has recently cut its 2016/17 forecast and now expects coffee output to fall to the lowest level in two decades. This is due to back-to-back droughts which have depleted ground water and ability of local producers to irrigate.

Coffee: Diverging prices

After reaching a ten-month high of 134.65 cents per pound in March, arabica prices fell to an average of 122.97 cents per pound in April. However more recently, prices have staged a strong rally rebounding to 132.70 cents per pound (up 11%) over the first two weeks of May.

The market has been well supported by non-commercial funds short-covering, or buying back, sold positions as dryer conditions across many production areas raise concerns for traders.

As a result, the arabica / robusta arbitrage has widened out again by more than 20% since the start of May. The differential dropped below 50 cents on a Jul-15 contract basis, for the first time since November 2015. The spread has now widened to 57 cents per pound, however is still at levels that may encourage roasters to use arabica into blends.

coffee Futures: Turning point

Given the hardiness of the robusta crop, many in the market are expecting the crop situation to not be as bad as many news headlines are proposing.
With all eyes on the skies and robusta producing countries waiting for rain, the coming months will be a critical period in determining the scale of coffee output and exports from these key areas.

- Agrimoney.