HOW TO REMOVE 15 MILLION BAGS FROM THE MARKET? By Rodrigo Costa

The increase on the cost to finance Spain’s debt has put a negative pressure on European Exchanges.

In the USA, the closing on the shortened week saw a slight drop, and the low number of jobs created in March will make the market open lower today, this post-Easter Monday.

The commodities still behaved well, despite the dollar appreciation and coffee closed almost unchanged, although there was great volatility Wednesday, beginning the session with a drop of 6.5 cents per pound, exploding 12 cents to the lows and closing that day at 7.5 cents to the highs.  A punishment to whoever had to adjust positions.

In the physical, the basis stayed at the same levels, and the buyer interest from roasters remains tepid, which many believe to be related to the fact that a greater  and more expensive level of fixation have been put in their books this year.

The Brazilian exports for Mar/12 were published by the CECAFE, totaling 2,189 511 bags in the month, with an accumulated 23,689 165 bags in the current crop year. It all points out to a total of 30 million bags when the cycle is closed, which with a consumption of 19 million bags will show a disappearing of 49 million bags.

An assiduous reader of this commentary, saluting it translation to English that begun last week, mentioned that he had doubts regarding the consumption in Brazil. Making comparisons with the US, he said that it is unlikely that Brazilians drink that much coffee, which would explain elevated exports, despite low inventories and crops that officially are always lower than what the market believes them to be.

It is an interesting point, however, if the conillon usage is around 10 million bags for the local market, if the volume of arabics “non-exportable” is around 7 million bags and if we assume that between 1 to 2 million bags of fine coffees are used for brands more refined, it could be that the numbers will add up in the end.

Another reader mentioned that the inventory in Brazil in the hands of the cooperatives is low, and that in his opinion, it will not be justified to have a selling pressure in the beginning of the 2012/13 crop.

The international market reads with surprise the news that Brazil intends to “retain” up to 15 million bags with an eventual support plan from the government. The reading in this is bearish, considering that the country says it has low inventories and that both the current and subsequent crops are well below the numbers with which the market had been working with. The reason is simple: “if the 2012/13 crop will be 52 million bags, the country will consume 19 million and will retain another 15 million, does this mean that the exports will only be 19 million?”

Sometimes measures that attempt to “help” the prices may end up putting more pressure on the quotes, especially if a plan to remove coffee from the market will stay on paper only….

Have a good week everyone.

*Rodrigo Corrêa da Costa writes this weekly report as a collaborator of Archer Consulting.