Good morning,

Find someone you love and give them an extra-long hug today, just because you can.

The market continued to take steps lower as the week progressed, again, and now with the breaking ofthe 96.00 level in Sept, there’s no reason why we shouldn’t test contract lows at 90.05.

Strong market forces are at work here, not the least of which are coffee related, but, currency and other macro factors also coming into play here, along with longer term funds adding to their short positions once again.

No weather events in sight for the Brazil coffee areas.

Exports in June were 10.937 million bags of 60 kgs, up 2.8% from the 10.638 of a year earlier. First nine months of the coffee year are then 97.28 million bags compared to 91.34 million in the same time period a year prior. According to the ICO.

New to Continental are: Brazil 2/3 screen 17/18, FTO Sumatra Mandheling, Colombia EP, Guatemala SHB EP, and Vietnam Wet Polished Robusta. They join all our favorites, please consult the offer list for a complete rundown of everything we have on offer this morning.

Our Dave Joelson continues his conversation he started last week in our blog, with some thoughts on moving forward in a tough world. He’d love to continue the discussion with you, preferably over a cup of Yirgacheffe…

Last week we shared a pessimistic view of the coffee market based upon the residual impact of generally high coffee prices from 2010 – 2017. This past week, a large brokerage firm came out with theview that although the market is “awash in coffee,” the lows are already in place because coffeeinventory is already hedged, we are going into a small supply-deficit year, and roaster & producer priced coverage is in better balance today than say half a year ago. They suggested futures prices could go to 115-120 in the medium term. We hope they are right but fear they may not be. Many producer groups are calling for action to support prices, and we suspect that these voices will grow louder.

This is hardly the first-time industry has considered steps to support prices; the most obvious and longest-lived scheme was the coffee quota that lasted nearly 30 years ending in 1989. For those interested, below is an abridged history of that effort – how it worked and what went wrong. If there is one lesson, it is that any effort to support prices ought to be simple and if we hope to take on the economic laws of supply and demand, our expectations should be realistic.

It’s very difficult to know what can realistically be accomplished. This is probably why the producer groups have been unable to clearly articulate a program they would like to see beyond the end objectiveof “higher prices.” Any successful program (one that results in higher prices) will result in further supplygrowth so we must assume that the costs of such program will either tend to increase as time goes by, or the program will ultimately not sustain higher prices in the longer term. Some ideas:

• An export tax on coffee with funds returned to producers for countries that wished to do so…Possibly, but how would the fund be administered and is it possible that producers who would benefit be pressured to take that much less commercially?
• (Yet another) new certification program focused on a sustainable price to producers, administered locally by each producing country that wished to participate. Some countries would be better equipped to manage such a program than others. Would it have credibility that the premium price really went where it was supposed to go?
• Various modifications to the NY ICE coffee futures contract to structure greater premiums for fresh coffees or high quality coffee. While any change to futures market rules takes three years to implement, the timeline of concern is a lot longer than that. Even if we had the rulessuggestions that may work, it’s not clear whether the owners of the exchange have any desire toparticipate in a program that would help producers.
• A small tax (pennies) on sales of coffee by the cup in consuming countries sympathetic toproducer plight….this really adds up in a hurry and many retailers or consumers would probablybe willing to pay if they were confident in the program, but how to administer without consuming most of the proceeds?

If it was easy it would have been done by now. With that said Armenia has been a part of some of these discussions and we are more than willing to support credible efforts that will ensure the enduring availability of coffee.What are your thoughts?
History of Price Supports – Coffee Quotas

From about 1963 until 1989, the International Coffee Organization (ICO) sponsored a system of quotas to support coffee prices. Unlike OPEC, the ICO included both producing and consuming nations, and the original motivation of the consuming countries – namely, North America, Western Europe, Asia – was to support coffee growing countries financially to discourage the ideological appeal of communism. Theseperiodic quota agreements (International Coffee Agreements or ICA’s) were complex even in theory andsubject to abuses in practice. The idea was to provide each member producing nation a quota of coffee they were permitted to export, while consuming countries passed actual laws requiring quota stamps for all coffee imported. The ICO monitored prices and issued more coffee quota stamps when prices went up, and reduced quotas when prices went down. Overall target price levels varied over the years but were generally considered to be fair for all parties. But there were plenty of issues if you consider that by definition, more coffee was grown worldwide than what could be exported to the member consuming nations:

• How to split up the quota between producing countries
• Within a producing country, how to split up the quota between exporters with political connections probably the most important if unofficial criteria
  • Domestically, it was a buyer’s market for exporters who held quota rights. Producers, who in aggregate held too much coffee, were at their mercy.
  • Unlikely that much of the benefit of the prices therefore went to the producer (though this may not have been the primary objective/motivation). Without a doubt, there were some attempts by producing countries to ensure some of the benefit went to the producer, but with varying degrees of success (and low degree of efficiency).
• What to do with the coffee that could not be sold under quota

All kinds of unintended results were felt including corruption, smuggling, rebagging, and so forth. Those who played by the rules were disadvantaged and this is what ultimately led to the collapse of the system in 1989.

The Armenia Team