Coffee Crushed as Slumping Real Spurs Brazil Sales
Comment of the Day

July 04 2013

Commentary by Eoin Treacy

Coffee Crushed as Slumping Real Spurs Brazil Sales

This article by Marvin G. Perez and Isis Almeida for Bloomberg may be of interest to subscribers. Here is a section
The weakest Brazilian real in four years is accelerating coffee shipments from the biggest growing nation, adding to a glut that is cutting costs for Starbucks Corp. and Kraft Foods Group Inc.

First-half shipments were 20 percent higher than a year earlier at 13.385 million bags, or 803,000 metric tons, the Brazilian Trade Ministry said July 1. The real's 9.4 percent retreat in the second quarter, the most among 24 major emerging-market currencies, increased revenue from dollar-denominated coffee sales and encouraged exporters to tap stockpiles that are the biggest since 2007.

Brazil is increasing competition among coffee sellers as farmers unload beans to clear storage space for the next harvest, judging that losses will be limited by translating dollar revenues into weaker reals. With global output exceeding demand for a fourth year, accelerating sales will drive prices down 11 percent to $1.08 a pound by Dec. 31 , according to the median of 18 analyst estimates compiled by Bloomberg.

“The lower real will most certainly help exports, making Brazil a much more aggressive seller,” said Rasmus Wolthers, a trader at Wolthers & Associates, a brokerage in Santos, Brazil. “There's a lot of coffee in Brazil, and there isn't enough space to store it all, so producers will have to sell. I expect to see much more aggressive sales offers.”

Eoin Treacy's view The US Dollar has been rallying reasonably consistently against the Brazilian Real since 2011 and broke out of its most recent range in June. While somewhat overbought in the very short-term, a sustained move below BRL2.10 would be required to begin to question medium-term potential for additional outperformance by the greenback.

Both the Arabic and Robusta varieties of coffee have fallen precipitously over the last two years. Arabic's decline has been characterised by a consistent progression of lower rally highs and while somewhat oversold in the short-term, a sustained move above 130¢ would be the minimum required to check supply dominance. On the other hand Robusta has been more rangebound over the same period and found support near the lower boundary from mid-June. A clear downward dynamic would be required to question potential for some additional upside.

JM Smucker and Starbucks remain absolute and relative strength leaders on Wall Street while Green Mountain Coffee is susceptible to some additional consolidation following an impressive advance since January. Nestle found support last week in the region of CHF60 and continues to extend its rebound.

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