Coffee prices dip amid fears of fund selling spree

Coffee prices dip amid fears of fund selling spree
 
Arabica coffee futures dropped below 180 cents a pound for the first time in more than four months, amid growing ideas of an imminent fund selling wave, and of a stand-off in the physical markets.

Arabica coffee futures for March, the best-traded lot, touched 179.85 cents a pound in New York, dropping below the psychologically important 180 cents-a-pound mark for the first time since July.

The lot recovered some ground to close at 180.10 cents a pound, although this represented the weakest finish since July.

The decline was attributed in part to a falling real, which has returned close to six-year lows against the dollar.

A weak real lowers the value, in dollar terms, of assets, such as coffee or sugar, in which Brazil is a key player.

The Brazilian real exchange rate remains weak against the dollar, even after increase of 0.5 points in the basic interest rate, the Selic, to 11.75% on Wednesday, Brazil’s Conselho Nacional do Café producers’ group said.

‘Funds liquidating positions’

However, the CNC also highlighted behind falling coffee prices the possibility of the index funds liquidating their positions in the arabica market, amid the annual rebalancing and reweighting process.

This involves commodity index funds rejigging their portfolios to return contracts to levels dictated by the index – or to changed index weightings – a factor typically meaning selling the best performers of the previous year and buying the worst performers.

For arabica coffee futures, this is expected to bring significant selling pressure, after their strong performance this year, and see index funds sell the equivalent of 22,060 lots a day during January’s five-day reweighting process for funds following the S&P GSCI and BCOM indexes, according to Societe Generale analysis

That is equivalent to 34% of daily volumes – making it by far the commodity most vulnerable to the reweighting process – with live cattle futures, which have also enjoyed a strong 2014, in second place, with selling expected equivalent to 15.7% of average daily volumes.

In dollar terms, arabica coffee will see a net outflow of $1.52bn, and live cattle one of $997m, according to SocGen, which cautioned over the likelihood of anticipation of the reweighting affecting sentiment long before the reweighting takes place, from January 8-14.

Robusta export surge

Meanwhile, Cepea, the research institute linked to Sao Paulo University, underlined the falling interest in trading in the physical market for now, ahead of the end-of-year holiday season, and with most export buyers already supplied.

Price Futures group on Thursday also flagged a dearth of interest from coffee users.

Therefore domestic prices have weakened, falling 4.2% last month to an average of R$460.95 per bag last month, and in turn leading sellers to be restrained, in expectation of new price increases, Cepea said, noting that prices had recently traded above R$500 per bag.

However, the institute also noted strong demand for Brazilian robusta beans, noting that the harvest in Vietnam, the top producer of the variety, has been presenting quality problems, according to the Vicofa industry group.

Brazilian coffee producers, whose supplies are in good condition, take advantage of this, Cepea said.

Brazilian robusta coffee exports soared 131% year on year to 1.3m bags in the July-to-October period, according to the Cecafe exporters’ council.