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Coffee Market Update: Volatility and Fragility Persist
NY Futures & Open Interest Trends May NY futures saw a 60+ ct range in February (366.30/429.95) before closing near January’s settlement. CIT data shows non-commercials liquidated ~10k lots above $4, while commercials unfortunately bought into strength. Total NY futures OI fell by ~30k lots, reflecting both this position shift and possible financial strain on some in the trade, limiting their ability to maintain traditional hedges.
Market Drivers & Uncertainties
Brazil Weather: Nov-Jan rains improved soil moisture, but conditions have since turned drier.
Tariffs & Trade: U.S. tariff policies targeting Canada, Mexico, and China, with more decisions expected by April 1. Viet Nam may face scrutiny given trade deficit data.
Geopolitics: Uncertainty persists, and risk-off sentiment can synchronize across markets.
Looking Ahead: Cracks in the Bull Story?
Non-Commercial Liquidation: February marked the first meaningful long liquidation since July 2024, with declining OI.
Arabica Differentials & Certification Risk: Above $4, washed Arabica diffs neared tenderable parity. Volume traded suggests potential certification/tender vs May NY.
Robusta Shift: Brazilian roasters maximizing Conillon usage, with an > $1 arbitrage driving a global shift toward Robusta.
Stock & Liquidity Concerns: Frontloading pre-EUDR & ILA has improved low destination stocks, but 25/26 Brazil crop remains historically undersold. Colombia’s output has also improved significantly.
Roasters & Trade Challenges
Consumer Response: Roasters are only now passing on cost increases, moving from $2-$2.50 to over $3. Holiday stockpiling likely influenced demand. Forward pricing remains hand-to-mouth amid price uncertainty.
Trade Liquidity Crunch: Market retreat to $3.70 offers little relief for stretched credit lines. Traditional hedge shifting to options strategies remains costly, with implied vols in the high 30s. Any delays at origin on unshipped coffee are unnerving.
Market Outlook: Finding Equilibrium
Partial Retracement Likely: A sharp price rally often leads to correction. Roasters may extend cover in the $3 - $3.50 range but will wait for price stability.
Supply Chain Fragility: If NY holds above $4, expect supply chain disruptions, defaults, and forced renegotiations on lower-priced purchases.
Downside Risks for Trade: If the trade isn’t fully hedged, a deeper decline could be problematic.
Bottom Line: The market remains highly fragile in both directions—balancing between liquidity constraints, uncertain fundamentals, and potential supply shocks.
