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Invasion of the Certs

There are now an impressive 263k bags of #coffee pending grading in Antwerp, and this puts a different spin on the bullishness of the certified inventory.

The previous narrative had been that the #coffeefutures market was decertifying coffee to consume, which had sent calendar spreads skyrocketing to 20+ year highs. However, the appearance of nearly 300k bags of pending stocks has challenged this narrative.

In this brief note, I'll talk about why Certs matter, how the pending stocks change this, and what to expect.

Why Certs Matter

Since certified inventory are fungible with futures contracts, they are central for price discovery in the #coffeemarket. Certified inventory levels have a strong inverse correlation with flat price and, when stocks get to low levels, can trigger inversions in calendar spreads.

A confluence of events has led to a situation where certified stocks have been drawing dramatically and they have reached lows not previously seen in decades.

First, the abysmal 2021 crop, and lackluster 2022 crop in Brazil robbed the exchange of their largest supplier of certified coffees. Colombia and Honduras also experienced poor crops and high differentials prohibited these from being tendered.

Second, the high differentials for washed arabicas incentivized the market to look for cheaper alternatives to mix in their blends. Decertified past crop coffees from the exchange are often used as Brazil natural replacements and can be used to cheapen blends that include these coffees.

Third, logistical problems stemming from Covid lockdowns sparked an increased desire for spot coffees which further incentivized the market to look to the exchange for coffee.

All of this has led to a dramatic drawdown in certified coffee bringing us to where we are today. Unless the new crop coffees are so plentiful that differentials come crashing down, we are unlikely to see any new coffees submitted to the exchange.

Or so we thought.

The appearance of these pending coffees caught the market off-guard (sort of). These are not new crop coffees that have suddenly appeared to save the day. These are most likely "recerts", in other words the owners of certified coffees have decertified their coffees and resubmitted them to the exchange.

It's no surprise that some coffees would be resubmitted to the exchange, however the quantity and speed of the pending grading inventory is impressive.

However, now this raises 3 important questions: how much coffee will be resubmitted to the exchange? how much coffee will pass? What will the net effect be?

How much coffee will be resubmitted?

My best guess is that we are near the max now, and there would be no more than 600k max.

I'm getting this from the following numbers. The incentive to recertify coffee would be to reset the aging penalty, and the 2020 crop washed Brazils would be most likely in this category. The change in origins from the passed gradings today supports this.

Assuming these are 2020 crop washed Brazils are what is being resubmitted, we have decertified 950k bags since 10/1. I would assume that not all of theme will be resubmitted, some must be being used for consumption. Also, some of these would not pass recertification, so the submitter may not bother submitting coffees that won't pass.

How much will pass?

As to how much will pass, we saw this first reported yesterday and out of 15k bags graded, 95% passed and were certified. If this rate is indicative of the entire amount submitted for grading, then there is a lot of potential for new coffees to hit the exchange.

Regarding net effect, it is more complicated to predict. It's not clear whether many stoppers are taking and decertifying coffee for consumption, and one certified holder is resubmitting their coffees, or whether the decertifier and the resubmitter are the same entity.

In the case of the former then it could be that while the exchange grades and recertifies some portion of these coffees, the stocks continue to decline or flatten out. However, if the resubmitter is also the primary entity who has been decertifying the coffee then we are likely to see stocks 100ks of thousands of bags.

The impact of certs raising from 550k to 800k is not mind-blowing bear territory. The absolute stock levels are still low and still pretty bullish. However, it does call into question how much appetite is left for consuming certified coffees and it does take some of the sting out of the current downtrend in stocks.

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