Rising margins trigger long liquidation in coffee futures

March Arabica Coffee (KCH25) is down -22.40 (-7.04%) today and January ICE Robusta Coffee (RMF25) is down -494 (-9.13%).

Coffee prices sold off heavily today to a weekly low. Long liquidation pressure weighed on coffee prices today after J. Ganes Consulting said it may no longer be justified to tie up a large amount of capital in a position in coffee after ICE last week increased its margins for holding positions in coffee futures had increased. Weakness in the Brazilian real (^USDBRL) is also bearish for coffee, as the real is down -1.8% today, just above last Friday’s record low against the dollar. The weaker real is boosting export sales for Brazilian coffee producers.

Last Friday, Arabica in March recorded a contract high and Arabica in December recorded a 47-year high of the next futures. Meanwhile, Robusta coffee hit a 2 1/2-month high in January. Coffee prices rose as adverse weather conditions in Brazil and Vietnam, the world’s two largest coffee producers, threatened global coffee production. According to Sucden Financial, the price increase also prompted some Brazilian coffee exporters to unwind their hedges and buy coffee futures to cover short positions, driving coffee prices even higher.

The impact of dry El Niño weather earlier this year could lead to longer-term damage to coffee crops in South and Central America. Rainfall in Brazil has been consistently below average since April, damaging coffee trees during the crucial flowering period and reducing prospects for Brazil’s 2025/26 Arabica coffee crop. According to the natural disaster monitoring center Cemaden, Brazil is experiencing its driest weather since 1981. Colombia, the world’s second largest Arabica producer, is also slowly recovering from the drought caused by El Niño earlier this year.

Below-average rainfall in Brazil could curb the country’s coffee production and have a positive impact on prices. Somar Meteorologia reported today that Minas Gerais, Brazil’s largest Arabica growing region, received 17.8 mm of rainfall last week, just 31% of the historical average. Minas Gerais is Brazil’s largest Arabica coffee growing region.

Robusta coffee prices are supported by reduced Robusta production. Due to the drought, Vietnam’s coffee production fell -20% to 1,472 MMT in the 2023/24 crop year, the smallest harvest in four years. The USDA FAS forecast on May 31 that Vietnam’s Robusta coffee production will decline slightly to 27.9 million bags in the new marketing year 2024/25, down from 28 million bags in the 2023/24 season.

Tight Robusta supplies support Robusta prices after the Vietnam Customs Office reported on November 11 that Vietnam’s October coffee exports fell -11.6% month-on-month to 45,412 tonnes and Vietnam’s January-October coffee exports fell -11.1% compared to the previous year to 1.15 million. Robusta coffee is also receiving support after recent rains flooded coffee fields and delayed the coffee harvest. Vietnam, the world’s largest Robusta producer, is at the beginning of its coffee harvest.

Coffee prices are also supported by November 22, when the USDA’s Foreign Agricultural Service (FAS) forecast Brazilian coffee production in 2024/25 at 66.4 MMT, below the USDA’s previous forecast of 69.9 MMT. The USDA’s FAS also forecasts that Brazil’s coffee stocks will be 1.2 million bags at the end of the 2024/25 season in June, down -26% year-on-year.

As a supporting factor for coffee prices, Conab, the Brazilian crop forecasting agency, on September 19 lowered its forecast for Brazilian coffee production in 2024 to 54.8 million bags from 58.8 million bags in May.

Signs of greater global coffee supply are weighing on prices after the International Coffee Organization (ICO) reported on November 8 that global coffee exports rose +25% year-on-year to 10.76 million bags in September and that Exports from October to September increased by +11.7% year-on-year to 137.27 million bags.

Tight coffee supplies are supporting coffee prices. Arabica coffee stocks monitored by ICE rebounded from a 24-year low of 224,066 bags in November 2023 to reach a 2-1/3-year high of 903,548 bags last Wednesday. Meanwhile, Robusta coffee inventories monitored by ICE fell to a seven-month low of 3,837 lots today, after rising to a 1-3/4-year high of 6,521 in July. Robusta coffee stocks monitored by ICE are moderately above the record low of 1,958 batches from February 2024.

The news about Brazilian coffee exports was pessimistic. On Nov. 18, Cecafe reported that Brazil’s green coffee exports rose +11% year-over-year to 4.57 million bags in Oct. Additionally, Cecafe reported on July 11 that Brazil’s 2023/24 coffee exports increased +33% year-on-year to a record 47.3 million bags.

As a pessimistic factor, the International Coffee Organization (ICO) recently forecast that global coffee production in 2023/24 will increase by +5.8% year-on-year to a record 178 million bags due to an exceptional non-biennial harvest year. ICO also said global coffee consumption would rise +2.2% year-on-year in 2023/24 to a record 177 million bags, resulting in a coffee surplus of 1 million bags.

The USDA’s June 20 semi-annual report was negative for coffee prices. The USDA’s Foreign Agriculture Service (FAS) forecast global coffee production to rise +4.2% year-on-year to 176.235 million bags in 2024/25, with Arabica production increasing +4.4% to 99,855 million bags and an increase of +3.9% Robusta production increased to 76.38 million bags. The USDA’s FAS forecasts that year-end 2024/25 inventories will increase +7.7% to 25.78 million bags from 23.93 million bags in 2023/24.

At the time of publication, Rich Asplund did not hold, directly or indirectly, any positions in any of the securities mentioned in this article. All information and data in this article are for informational purposes only. For more information, please see Barchart’s disclosure policy here.
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