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PRUDENTIAL SECURITIES, INC.
One New York Plaza, New York, New York
(November 17, 1997) COFFEE: Coffee futures advanced last week to their highest level since mid-October. The strong performance not only reflected several constructive fundamental developments, but also probably was a response to ideas that the eight-week price slide had run its course, and that the market was “due” for an upside correction.
The constructive fundamental developments underpinning the market last week may be summarized as follows:
–Potential crop damage in several major Mexican growing areas (Chiapas, Oaxaca) due to torrential rains and strong winds (tropical storm Rick).
–A low Brazilian export figure of 1.29 million bags for October, roughly 33% less than was shipped during October 1996.
–Low October arrivals at Brazilian farm cooperatives: 461,063 bags versus 1.02 million in September and 836,361 bags in October 1996.
–General anticipation that the forthcoming U.S. green coffee stocks figure, to be released November 17, will show a sizable drawdown.
–Continued concern that El Nino-related dryness in Indonesia would cause significant damage to that country's 1997/98 robusta crop. (This situation is a leading factor behind the London market's strength.)
–A statement by the Association of Coffee Producing Countries (ACPC) that its members probably would fall short of their 1997/98 (July/June) export target of 52.75 million bags by about 3-9 million bags. Adverse weather conditions, in some instances caused by El Nino-induced dryness, was given as the reason for the deteriorating availability outlook. The statistical picture for individual ACPC member countries or areas is shown in Table 1, which compares export targets (i.e., an export ceiling as visualized by the ACPC) and expected export figures released by individual members.
–A report by the Hamburg-based trade firm Bernhard Rothfos in which the global 1997/99 production forecast was reduced 1.6 million bags from the July projection to 98.5 million bags; world output in 1996/97 was 100.2 million. The firm's forecast for Brazil's 1997/98 crop is 24.5 million bags, substantially below the USDA's June estimate of 28 million; Colombia is expected to produce 11.2 million bags versus the USDA's forecast of 11.3 million. Similarly, F,O. Licht, the German commodity publishing firm, has projected global 1997/98 output at 98.8 million bags, down from the previous season's output of 102.4 million.
Table 1
1997/98 Export Limits As Proposed By The ACPC
(million bags green coffee)
Jul-Jan- Country Dec '96 Jun '97 Total Expected Brazil 9.00 6.00 15.00 13.00 Colombia 5.25 5.40 10.65 10.65 C. America* 3.10 5.82 8.92 8.42 Venezuela 0.10 0.23 0.33 0.33 Indonesia 3.50 2.35 5.85 5.00 Africa 6.00 6.00 12.00 11.50 Tota l26.95 25.80 52.75 48.90
*Costa Rica, El Salvador, Honduras, Nicaragua and Ecuador.
Source–ACPC
The market's recent low (136.30 cents per pound, basis March) was made on November 4 and represented a test of the lows seen in June and July. We now consider this price area a bottom. We lean toward higher prices, but expect March futures will have difficulty penetrating the 158- cent area over the near term.
Arthur Stevenson
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