Trade Idea – Commodities – Bearish bets on coffee hit record high
26th November 2015

Coffee prices to remain depressed

•         Last week the BRL staged a 3% rally as the incumbent Brazilian President, Dilma Rousseff, won a political victory aimed at narrowing the country’s growing budget deficit. The strengthening of the BRL sent the price of Arabica coffee soaring 8% from 23 month lows (see Figure 1, Source: Bloomberg) and partially reversed a downward trend that has plagued the soft commodity since the end of last year. Brazil is the largest global exporter of Arabica coffee and the recent weakening of its currency has, until September, significantly weighed on the coffee price[1]. In coming months, we expect support from favourable currency movements to fade and a strong coffee supply outlook for 2016/17 crop year to weigh on price, benefiting those investors with tactical short exposure to coffee.

Speculative coffee positioning reaches record low

•         According to the Commodity Futures Trading Commission (CFTC), short bets on coffee swelled to the highest level on record in the week to Nov 17 (see figure 2), reflecting the bearish sentiment that has dominated coffee trading until last week’s recovery. We believe that bearish sentiment will reassert and help to push coffee prices lower as soon as BRL strength abates. The Brazilian economy is currently under considerable duress as stagflation and political turmoil weigh on the nation’s prospects. Therefore, we believe that the optimism that has fuelled the recent BRL appreciation is fragile and will likely fade as the economy slips further into recession and political uncertainty persists.

Favourable supply outlook

•         The Brazilian harvest for 2015/16 is almost complete and despite the 2014 drought prompting forecasts of a large fall in production, output has only fallen 3% YoY (Source: United States Department of Agriculture). Looking ahead to next year, good rain in key producing regions is helping the flowering process of Brazilian coffee trees which should aid coffee cherry development and in turn increase the likelihood of a strong yield from the 2016/17 harvest.

•         Elsewhere, Columbia and Honduras have seen production grow 40% and 46% respectively over the past five years as tree renovation programmes, aimed at combatting coffee rust (disease that affects coffee plantations), pay considerable dividends (see Figure 3). Given that both are top five global exporters of coffee (third and fifth respectively) this trend will likely be another source of pressure on coffee prices in the near future.

Investors wishing to express the investment views outlined above may consider using the following ETF Securities ETPs:

Coffee
•         ETFS Coffee (COFF)
•         ETFS 2x Daily Long Coffee (LCFE)
•         ETFS 1x Daily Short Coffee (SCFE)
•         ETFS 3x Daily Long Coffee (3CFL)
•         ETFS 3x Daily Short Coffee (3CFS)
•         ETFS EUR Daily Hedged Coffee (ECOF)
•         Swiss Franc Daily Hedged Coffee (CCOF)

The complete ETF Securities product list can be found here.
[1] Brazilian coffee suppliers increase output as a weaker BRL means that their produce become cheaper on international US Dollar denominated markets.

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