Another big day in the #CoffeeMarkets this time spurred by two pieces of news:
1) Brazilian gov't is issuing water advisories in several states including Parana, Sao Paolo and Minas which is a huge portion of the global supply of #coffee.
2) A warehouse shutting down in SP, Brazil due to #Covid.
The fundamentals are more complex. The Fundamentals are unequivocally Bullish in the second half of the year and the second half of the year is just around the corner.
Personally, I felt like the first few months of the #BrazilianHarvest was too early to be bullish. I thought that the market should be getting hedging from the Brazil crop soon and that there is available #originstocks in Brazil and that we would see #DestinationStocks rise over the next few months. Plus #Certstocks are high and rising and seasonality confirms that this is a weak time of year.
However, the market has proven me wrong in thinking that any of that matters. It would seem that the market is consolidating opinion that the time to be bullish is now.
The weather is also becoming increasingly concerning. We have noted for weeks now that there is dryness in MG, the key growing region of Brazil. This is not terrifying news because it is not the #flowering season so the impact is not acute on the plant. However, it has been a slow burn and now there is talk that the dryness may persist longer term.
I don't personally see it in the long term forecasts, but weather is more complex than simply looking at a monthly precipitation anomaly.
#Frost is not an issue in the short term forecasts, but if it shows up in any meaningful way the market will go ape.
The positioning is also a bit more nuanced. Typically, we look at the #spec/#managedmoney position as the driver of big price moves and since the MMN is already long, this isn't super bullish. However, as a percent of OI we are nowhere near the recent max levels of 2016 (~11% vs ~22%) so there is still room to add.
At the end of the day, what we have to say is that #volatility is here. #ImpliedVol is back up to the 40s and that is meaningful. We have seen 5-10c days on increasingly frequent basis over the last few months. The question now is what will happen to price?
It could be that we decide in a few days that a lot of the weather risk is overblown, the Brazilians could start to sell their coffee and we see some Spec wash out. This would totally validate my short term bearish view, but I have to admit that this is looking unlikely at this point.
We could see some volatility to the downside for sure, but at this point we have to ask if the market is going to go to 200 and not look back. That seems to be the greater risk at the moment.