Coffee grinds, Sugar is sweet

Intermediate
  • Coffee bulls are scattered as bad weather in Brazil recedes
  • Global stocks are high after a bumper crop in 2018
  • The sugar market is set to slip into a deficit
  • Sugar production in India could fall as much as 15 per cent in 2019-20

I look at the one-year chart for coffee and find it hard to understand why several analysts are making bullish recommendations.

coffee

Source: www.tradingeconomics.com , Spotlight Ideas

The recent price moves to the downside have posted a warning to for chart-watching coffee traders and producers alike. Certainly, the technical sentiment out to the one-month view is dominated by “Sell” and “Strong Sell” signals. The fact that the downside is so well supported in the technical sense does not suggest the recent wave of selling has left the market being oversold.

This is in stark contrast to the recent push to the upside that was driven by a sense of prices being too low when accompanied by reports of frost affecting the crop. Indeed, now the fundamentals for coffee are still negative.

Speculators have resumed their selling as the prospect of threatening weather in Brazil has receded; this matters as Brazil is the world’s largest producer of coffee beans. Brazil’s coffee farmers produced almost 70 million bags of coffee last year; nearly 40% of global supply.

Similarly, fuelling the downside was a report from Colombian growers showing an uptick in shipments in May. These shipments are driven as 2018 was the second year in a row of major global overproduction of coffee, which has pushed down wholesale prices to their lowest level in years.

The imbalance is exacerbated as the bumper crop of 2018 has coincided with a plunge in the value of Brazil’s currency, the real, which has lost almost half of its value in the past five-years. This has meant that approximately 60% of all arabica grown is sold below cost. (Source: E D & F Man)

For now, I am selling coffee and would target a decline to U.S. Cents 95.65/lb as my first target with a stop at U.S. Cents 104.10/lb.

I would not want to be thought as negative across the “softs” space. After two years of surplus in the global market for sugar, I am looking for a deficit of anywhere around 2-4 million tons in the next season and as a result the prices should move up from the current levels.

sugar one year

Source: www.tradingeconomics.com , Spotlight Ideas

A little context is required as in the international market as over the last couple of years, there was a surplus. The season which closes on September 30th, 2019, also showed a surplus of about 4-4.5 million tons in the international market.

The 2019-20 sugar season starting on October 1st, 2019, will see a deficit and a level of 2-4 million tons in is forecast. India is the second largest global sugar producer (#1 is Brazil) and production in India could fall as much as 15% in 2019-20 from the year before as severe drought hits a key growing region, industry sources told Reuters.

The drop would ease pressure on the sugar mills to export surplus sugar, likely supporting global prices Therefore, the prices should move up from the current levels globally.

In the immediate future the technical sentiment is favourable as from 15-minutes through to one-week the sentiment is “Strong Buy”.  Spot has charged past both the 50 and 200-day moving averages

I am a buyer and set my first target at U.S. Cents 13.35/lb and then U.S. Cents 14.75/lb. My stop is placed at U.S. Cents 11.50/lb.

Stephen Pope

Macroeconomic Strategist

Stephen Pope is the Managing Partner of Spotlight Group. He has worked in the world of finance since 1982 and has performed d...continued

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