GCA Stocks vs KC Stocks Which Determines Price?

We have a fundamental disconnect between #CertStocks which are approaching the 5 year highs and #GCAstocks which are flirting with their 5 year lows. If the GCA stocks win out, then we are looking at a rather bullish market, if Certs win out then we are looking at a #bearish market.

As someone who believes in #commodity #fundamentals, it is a basic premise that price is determined by the intersection of #SupplyAndDemand and stocks are #Supply in the present. #Demand we can usually hold relatively constant as the less volatile of the two (#Covid could be a notable exception to this rule). Therefore, it should be unsurprising that there is an inverse relationship between stocks and price (low stocks = high prices, high stocks = low prices).

What IS surprising, is that Certs have been increasing in a positive correlation with price. Prices rising at the same time as Stocks (top chart in the graphic).

However, there are a couple of mitigating factors that we have to look at to evaluate this:

1)Washed Brazils--the addition of #Brazils to the C contract means that the contract is now fundamentally resetting itself according to this new norm. #Brazil makes up approximately 40% of the global #Arabica production, and there are 1.2 mm bags of Washed Brazils out of 2.2 mm bags of #CertifiedCoffee.

So this is a reorganizing of the certified coffees to include the world's largest supplier of Arabica, it is NOT reflective of a massive increase in supply.

If we remove these Brazils from the Certs (to maintain continuity with the previous certified inventory numbers), then the supply of certified inventory is closer to 1 million bags--a 5 year low for coffee!

2)Certs are only PART of the supply picture--GCA stocks are 3-7 times as large as Certs, and thus MUCH more representative of Supply. GCA stocks have always had Brazils counted in them, and they tell a very different story. GCA stocks are at 5 year lows.

We ARE seeing a seasonal increase in GCA stocks, and I would expect them to increase at least through June if not July. Regardless of whether the Brazil crop is "small" compared to last year, it is still the largest in the world by order of magnitudes. So we will see a seasonal increase as that is digested. This seasonal increase combined with the larger Certified inventory could indeed

be bearish for coffee in the present, but to me it is not reflective of the 21/22 deficit. We should see the deficit materialize and hit its peak between Jul and the 22/23 Brazil crop next May. That will be the real test for high prices

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