Caffeine Addicts, Beware the Shrinking Coffee Supplies
Comment of the Day

March 08 2016

Commentary by Eoin Treacy

Caffeine Addicts, Beware the Shrinking Coffee Supplies

This note by Marvin G. Perez for Bloomberg may be of interest to subscribers. Here is a section: 

Slumping coffee stockpiles are signaling that caffeine fiends may start paying more for their morning buzz. Inventories of arabica beans at warehouses monitored by ICE Futures U.S. have tumbled 12 percent this year to the lowest since May 2012. Prices traded in New York reached a two-year low in January, and the shrinking glut shows that cup of Joe may not stay cheap for long as global demand gains, said Fain Shaffer, the president of Infinity Trading Corp. in Indianapolis.

Eoin Treacy's view

Coffee is addictive so demand growth is reasonably unaffected by moderate moves in the price of the commodity. It’s also a high margin business for companies like Starbucks where the majority of costs are in rent and labour rather than raw materials. 

Supply is a different story because of the life cycle of the coffee tree. It can take anything up to five years to produce a fruit bearing tree. This means coffee prices are prone to multi-year moves where uptrends eventually lead to increases in supply and downtrends eventually mean trees are ripped out to make way for more profitable cash crops or diseased plants are not replaced. 

It’s been like waiting for Godot watching the coffee market trend lower over the last year. The loss of downward momentum is evident and prices have bounced from the 110¢ area on four different occasions since September. As I have mentioned in the past this is potentially Type-2 bottom formation development. However we will not have evidence that this bottoming formation is complete until prices break conclusively above the trend mean. 

White sugar trended lower for even longer and broke its downtrend in September. It is currently forming what looks like a first step above the Type-2 base. Its backwardation suggests a near-term supply deficit. A sustained move below the February low would be required to begin to question recovery potential. 

Elsewhere soybeans caught my attention during today’s market click through. It has been ranging in an inert manner since September and is currently testing the upper side of the range. A sustained move above 900¢ would signal a return to demand dominance beyond near-term steadying. 

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