October 17, 2022
The C market saw an exciting week by most accounts. Prices dropped almost 10% on the active December contract and saw three-month lows overall. The general fuel behind the selloff was the nearby backwardation collapsing after reaching extreme highs last week. The “backwardation” is basically the premium the nearby contract (December) carries to the next futures delivery month. In normal trading nearby months trade at a discount to the forward months, reflecting the cost to carry coffee from one month to the next. In recent months, the market has seen the nearby month move to a premium to the next sharply, as exchange stock dwindled, and speculators were looking for a squeeze (forcing shorts to cover at extreme prices). So, this squeeze happened over the last week as shorts paid to an extreme to cover their positions. Once that buying abated though the structure quickly started to narrow, and it dropped sharply over recent days generating speculative selling along the way. Industry buying was particularly good over the last two sessions as opportunities at multi-month lows developed. A modest backwardation remains at this point, which could reflect the perception of tight physical supplies for a while longer but would expect that things will “normalize” over the coming months. Aside from the C market activity there was also some modest relief on the differential front over the last week, though mostly on nearby deliveries. Forward offers remain firm overall, but perhaps the extreme differential strength of recent months is starting to show signs of easing a little. The Brazil crop is seeing favorable weather for development overall. Aside from that there is little to talk about on the fundamental front. The C market fit in with the overall macro picture this week which saw pressure across the board on the back of disappointing inflation data.
Technically the market finished the week in a negative, and even slightly oversold, stance. The market closed weakly and is close to testing support into the July lows. This should keep things under pressure for the coming days. Chart patterns continue to point toward a test of the 180 area (from an Elliott wave perspective a target at 18185 has been in play for some time) over the coming weeks. That said though, patterns are not suggesting a new bear run at this point. All the recent activity appears to be part of a larger corrective pattern and prices could easily return toward 220/230 with little effort. Whether or not a run toward the years highs would be possible will take some time to consider. At this point though continue to view this decline as a good buying opportunity for needed cover at least through the first half of next year. Expect volatility to remain high for the near term.
Not much to talk about this week. Production and weather remained steady this week with continued rains in India as well as in Argentina as farmers prepare for the upcoming harvest. Argentina saw low precipitation earlier in the year in, but recent weeks have brought rain and seem to point towards a favorable harvest. Some favorable developments on the logistics side of things are encouraging for a more dynamic flow but core inputs such as fuel and fertilizer remain a huge question mark. Overall focus will be shifting toward Argentine buying season. While there is some optimism after last year’s struggles prices will be firm with the inflationary background.
For further insight and analysis on current coffee and tea market data, take a look at the weekly report from the Westrock Coffee commodities team.
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