Progreso Network will publish a weekly analysis about trends and prices of coffee from the consultant Jos Algra. Jos has 20 years working experience in the coffee trading and consulting on risk management in coffee organizations.
Calculations Comment, 9 September, Jos Algra
NY nearly touched the ceiling of 200 (December), no doubts the funds will try it again and if they don’t succeed the market will come down just as fast. Resistance at 201, 210 and who knows what next level. Support at 188, 164 and, most solid, 155. Roasters are covered with coffee, but haven’t fixed, waiting for the market to come down. Did they miscalculate? If they start fixing the market will go up. The main exporters are waiting with fixing too and the market continues in the hands of the funds. Who has the longest breath? London doesn’t follow NY, to the contrary, it has gone down to the 1,600-1,700 $/MT (73-77 cts/lb) range and roasters will be rethinking the weight of Robusta in the blends.
Nestlé is also considering this, but in the long run. It plans to invest over $ 330 million to avoid the upcoming scarcity of coffee with varieties that adapt better to climate change. Robusta has an important role in the plan, its cheaper, yields more in instant Coffee and it adapts better. Washed Arabica producers are against.
The climate had an important role this week. The little rains in Brazil are good for flowering, but if this continues it may damage the crop. It continues raining abundantly in Colombia, Central America and Mexico and we’ve heard the first reports that it’s starting to cause damage. Temporary weather conditions or climate change? The harvest in Colombia will need another 4-6 weeks to initiate and the mid harvest (Colombia has 2 harvests) doesn’t look good. The differentials that had come down since July are consolidating, but what they say is not necessarily what they pay; limited volume traded.
So you’d better draw your plans with 2 scenarios: 155-180 with “normal” differentials and 180-200 with differentials and local prices soaring even more than last year. Calculate the difference in working capital between the two scenarios and what difference it makes if you sell with the current differentials and have to buy with high differentials like last season. Maybe better sell part of the crop now to get the pre-finance for the start and contract the rest mid harvest as the coffee comes through and prices evolve?
Those who fixed contracts some months ago are prying hard now for the market to dome down, the rest is doubting whether this is a good moment to fix at least part of the crop. Think also about your buyers, who guarantees that producers will deliver the contracts that were fixed at 150-170 where they still have to procure the coffee? Have you calculated how much they have to invest with NY at 190 per contract that you fixed at 150 without the roaster having fixed?: $ 5,500 deposit for each 37,500 lbs and margin calls for each cent that the market goes up. The lack of finance will put a cap on the price.
If you foresee liquidity problems, your competitors will have problems too; they may have more capital and credit, but the financial needs go hand in hand with the size and big traders also have a limit. Don’t exaggerate with purchase prices, calculate what margin you need to cover your costs and comply with your commitments.