In #Coffee, and in many #commodities like it, stocks (inventory levels) drive price. This is particularly true in coffee because the #demand for coffee is relatively #inelastic. This means that stocks are the volatile component of the #supply and #demand curve and therefore it is the portion of the #fundamentals that requires special attention and hard data.
What Are Destination Stocks
Destination stocks represent the global supply of green coffee in non-producing countries. This is as opposed to supply in #origin countries (origin stocks) where coffee is grown.
One of the key differences between origin stocks and destination stocks is the reliability of the data. In origin, there is a dearth of widely accepted reporting on stock levels. However, we have 3 reputable sources that provide reliable coffee destination stock data. This covers a large swatch of the coffee consuming world.
Aside from the location, the other important distinction of the destination stocks is the type of coffee. We are concerned with Green coffee (unroasted), as this coffee is more liquid (tradeable) and storable. Once coffee is roasted, it is considered to be “consumed” and is taken out of destination stocks.
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The 3 Coffee Destination Stocks
There are 3 different Coffee Destination stock reports that are publicly available (we distribute these for free to members, sign up here). The #GCA, #ECF and #JCA stock reports.
These represent three key destination markets across three continents. We have the GCA (Green Coffee Association) which reports total green coffee in warehouses across the United States. We have the ECF (European Coffee Federation) which reports Green Coffee across the European Union. We also have the JCA (Japan Coffee Association) which reports Green Coffee stored in warehouse in Japan.
Although this does not include all Destination markets that consume coffee, taken together they cover a vast amount of the destination market. When we refer to “Destination Stocks”, analysts are typically talking about the publicly available data of these 3 reports.
When evaluating these reports and determining the impact on the market, we are concerned with 3 factors: timeliness, relevance and granularity.
Timeliness concerns how frequently and reliably the reports are updated, relevance means the overall volume and share of the global market and granularity is concerned with how detailed are the reports. There is a trade-off with all of these factors and no-one report delivers on all fronts.
The GCA stocks are the most timely and relevant. While smaller than the European market, the US market is still a very large consumption market and so this report can be considered a sizeable chunk of global demand. In addition, the GCA stocks come out like clockwork on the 15th every month (or the next business day) at 330pm. This makes the anticipation and reaction to this report particularly relevant to the coffee market.
What the GCA stocks report lacks is granularity. The GCA stocks report covers multiple ports in the United States but includes only total coffee (Arabica plus Robusta), so we have little insight into the division of type.
Its also worth noting that both the GCA and ECF stocks reports include exchange stocks in their numbers.
The ECF stocks report is relevant (largest consumer market) and has granularity over type (Mild Arabica, Natural Arabica, and Robusta), however it is the least timely. It is supposed to come out every two months, but the timing of publication is inconsistent.
Since many of the major tradehouses maintain their own estimations of European inventories, and this report is so slow to publish, this report is considered less impactful. Often major changes (higher or lower inventories) are known, or suspected in the market before the report comes out.
The JCA stocks are timely, coming out at the beginning of every month and granular (includes quantities of major coffee origins), but is less relevant as Japan is a smaller market than either Europe or the US. Additionally, the Japanese market is a bit more insular than others and so the numbers don’t necessarily reflect wider trends the same way that the European and US stocks do.
However, all 3 of these reports together do provide a solid, if somewhat delayed view of what stocks are available in the consuming markets.
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How Destination Stocks Influence Price
Inventory levels are a key driver of futures prices, and the best model we have to understand this relationship is through the stocks/use ratio.
The stocks-to-use ratio distills the supply and demand curve into a single number (supply divided by demand). This number is the component of fundamental price models that aim to predict prices in the future (futures prices in the future, wow that’s so meta!).
The relationship between stocks to use and price is simple: high stocks to use (lots of supply available to little demand) means prices will be low, conversely low stocks to use (few stocks available to heavy demand) mean that prices will be high.
Since demand for coffee tends to be inelastic (it doesn’t change rapidly in response to price), the supply is the most volatile component of the stocks to use ratio. This means that global market is very concerned with what stock levels are, and what they will be in the future.
Interpreting the data of what is in the stock reports involves looking at what typical patterns are and observing and anticipating deviations from those patterns. Typically, we see a seasonal ebb and flow of stock that represents the harvest and growth periods of the coffee origins. A particularly low high period in stocks might confirm fears that production levels were less than expected.
There is one final, important aspect of stock reports that I have left out so far: demand. I have made it a point to say that demand is relatively stable in coffee, but this is not always the case. During the Covid crisis, demand was notoriously crushed in coffee due to the closing of shops, restaurants and travel. We can get an idea of demand through imports, but this is only half of the story.
The other half is stock levels. High imports with rising inventory doesn’t necessarily mean demand is high, it could indicate that coffee is cheap and being stored in destination markets. Low imports with declining inventory could indicate demand is high, but availability is low.
Putting it all together, we can say that destination stocks represent an important component of the global coffee supply and demand picture.
Since destination markets are where the majority of coffee is consumed, Destination Stocks are where the rubber meets the road: it is where present supply is available to meet demand. We can also see that destination stocks also provide key insight into demand itself when combined with imports. Finally, destination stocks are the dynamic side of the all-important stocks to use ratio which models and predicts prices.
If you want to take advantage of these key reports, the first step is to receive them (sign up here), second is to keep abreast of them and observe the patterns. The final step, is to predict their movements, as those who are able to successfully predict stock levels will have real insight into predicting prices.
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