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Coffee Report Focus #4: GCA Stocks

After last month's surprise GCA stocks report, many of us in the #coffee industry were watching closely this week's report, because the implications on price could be huge.

What we saw was on the surface a relatively ho-hum number, but I would contend it was actually fairly #bearish.

In the article that follows I explain how I interpret this report generally, and why this week's report was bearish for price.

To explain the GCA stocks number from Friday, we will first look at why we follow them, then we will look at how we should read the reports, then we will conclude with some thoughts on Friday's number.

Why should we care?

First and foremost because #stocks influence #price. One of the most fundamental premises for #commodity #traders is that stocks and price are inversely related. In the graphic below showing the relationship between certified stocks and price we can see very clearly the inverse relationship (more on how that relationship has changed here).

While the certified stocks are the supply of tenderable coffee, and are therefore vital to price discovery, the GCA stocks encompasses a much broader swath of destination stocks.

Supply and Demand meet at Price

Destination stocks are the key stock relevant to price discovery because it is at destination that supply meets demand.

Origin stocks are also important, and there is a certainly a demand for origin stocks, but there is a key difference. Destination markets do not have a locally renewable stock of coffee, so that stockpile represents the only coffee available to meet demand with a lead time close to zero.

Moreover, the data on destination stocks is generally more visible and reliable then origin stocks, so the market relies on this data for price discovery.

There is another more direct reason that we care about destination stocks, and that is that they enable us to evaluate consumption. Consumption is not very measurable directly (grocery store scanner data a possible exception to this), so in order for the market to calculate demand, we look at "disappearance".

Disappearance is calculated by taking net imports and subtracting the difference between opening and closing stocks ("stock-change"). The resulting number is the amount of coffee consumed during that period. When closing stocks are bigger than expected, this implies that demand was less than expected...essentially we are assuming a smaller chunk of imports were consumed.

This is why when stocks are building counter to expectations it is taken as indication of weak demand.

(Below is some further context from my friend Dave Behrends in his interview on Coffee

How should we read them?

The primary way to read GCA stocks is through #seasonality. The concept is similar to price #seasonals (see my article on the subject here). You simply overlay the current data on a yearly basis over previous years, usually with a an average to show the general trend.

In a surplus year, we would generally expect stocks to build a little bit extra on top of seasonality. In a deficit year, we would expect them to draw a bit more than seasonality.

In the USA stocks in particular we can see that the there is a noticeable "hump" in the trend. This reflects the seasonal production from origin that hits the USA warehouses.

This is why we often look at imports as a general indicator of what the GCA stock change might be. Large imports generally suggest a stock build.

This brings us to how to look at the stocks themselves, and interpret the data. It can be summed up in a sentence.

"We look at the difference from expectations."

What did we see this month, and why is it bearish?

This month we were expecting a stock draw based on seasonality, which we got. The average decline for the last several years was between 1.5 and 1.8% and September clocked in at -1.8%. However, the market was expected to be in large deficit this year which means that we should have dipped significantly below that number.

The fact that last month was above the average and this month was right at the average is leading some to question the depth of the anticipated #deficit. More specifically, it raises questions about the #demand recovery, and whether it is as strong as many of us had hoped for.

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