Breakout of the Decade

#Coffeefutures have broken out of the 200-210 range, surpassed its post #frost high of highest 217.85, and even surpassed the highs of the 2014 #Brazil #drought. This puts the current bull #market as the highest #coffee prices in nearly a decade. How strong is this bull market, and where do we go from here? From Brazil, Destination Stocks, to Chart, I break down some of the biggest drivers on price in the sections below.

Brazil 22/23 Crop

As per usual, the #coffeemarket depends on Brazil. Last year (21/22 crop) we had a drought that knocked lower an already off-season crop, and we capped it off with a dramatic frost and follow-up drought that damaged the expected bumper crop for 22/23. Some of the first estimates and analyses of the 22 crop are starting to trickle in.

After the frost/drought damage, the Brazil crop was saved by heavy and extensive rains in end of Sep through October that headed off disaster and replenished the soil moisture to kick off the delayed wet season. Although these rains were necessary and sufficient to stave off disaster and further damage, the damage was already done. A severe frost will kill off foliage, top-growth, and young shoots of the coffee plant and can depress the succeeding 2-3 years harvest. The widespread, severe frost is well documented and well-known. What is not known, is an exact quantification of the damage. Several surveys with varying degrees of credibility were done in the weeks that followed the frost , with consensus estimates ranging from 3 - 10 million bags off the 22/23 crop. The rains that followed the frost and drought produced very nice flowerings, but now we have to see how many of those flowerings were successfully pollinated and will grow into cherries. Then next best data point that we have will be the number of pinhead cherries that we see on the branch. After a successful pollination, the flowers fall off and the ovaries of the plant swell (slowly at first) and but are visible within about 2 months. These are the pinhead cherries.

Pinhead Cherries

Agronomists are already travelling the country to count these pinhead cherries, and this will allow the next best estimate of the crop. However, the first flowerings started end of September, and more like the first weeks in October so we are really pushing the boundaries of that 2 month threshold at this point.

Individual farmers, and the farmer's coops are in the best position to forecast the crop, but they have a financial incentive to paint the crop in the worst possible light. Thus the tradehouse estimates are a very useful counter-point to farmer estimates.

The price action suggests that the tradehouses either already have made their initial estimates (and they are bullish), or substantial amounts of specs are front running the reports and guessing that they will be bullish. My money would be on the former.

Destination Stocks

There are several key destination stocks that I look at, and they paint a bullish picture. First and foremost is the GCA stocks. The GCA stocks are the buffer stocks for the USA, and it is where supply meets consumption. As you can see in the below chart, we are well below the 5 year average and are projected to continue lower.

The most recent data point for October was significantly above expectations for me. Given the hefty deficit this year, I was looking for stocks to decline towards 4.5-5 million bags by next March. The last few months have not really met that expectation, so this is a data point to watch here. For me this is an unresolved point in the narrative.

That said, others have made the point that the GCA stocks are basically as low as they can get and therefore that they will not move much lower even with the deficit. It is a fair point, so we will see if that is the case.

A more bullish source for destination stocks is the certified inventory. Cert stocks are rapidly declining (in both Arabica and Robusta) and this indicates strong demand and that the economics are telling us that decertifying coffees is attractive.

European stocks are higher than US, and the reports are a bit delayed, but last time they reported they were drawing against the normal seasonal pattern.

Chart

On the long term chart, Arabica looks strong. The rally started with a rounded bottom reversal pattern and we have now surpassed the two strongest point of resistance: the July frost high of 215.20 and the 2014 Drought high of 225.50 Those are significant milestones as the only strong resistance left from a chart perspective is the 2011 high of 306.25.

The other interesting point on the long term chart is the angle of this rally. A very sharp angles rally is not very sustainable. These rallies tend to happen from a combination of shock, fear and lack of liquidity. The volatile nature of these type of rallies work both ways, at some point, we start asking ourselves why we are paying 200 guilders for a tulip bulb and the market crashes back down. This type of parabolic shape usually exists at the end of a sustained rally and can extend quite far.

However, the lower angle of the current rally suggests that this is not just the final emotional gasps of an extended bull market built on fear but rather, a gradually shifting sentiment across market participants who have every opportunity to study the fundamentals.

Conclusion

This market could be on its last gasps and about to turn around and tank. It could be that the tradehouses are doing their surveys and will report back that the Brazilian crop is a lot healthier than everyone expected. However, at present, it doesn't really look that way. Personally, I want to wait until I have some definitive reports back from Brazil about the upcoming crop before I draw any major conclusions about price. But the market doesn't look like it is going to wait, the price is telling us that the estimates are in, and they don't look good.