Good morning,

In a week shortened by the US holiday, New York futures continued their upward path as March appreciated another 6 cents to 115.65 while London was up less than a penny. The arbitrage, or premium for generic arabica versus robusta, therefore strengthened (March to March futures) to 55 cents as the market seeks to ration the scarcer nicer coffees. This rationing appears to be continuing this week with the NY market continuing the upward path Monday morning by 2-3 cents while London’s gains are much more modest.

The speculative funds continue to drive the market and we had ended the previous week with computer systems disagreeing as the market direction. The longer term, more patient types were still believing in the down trend but last week and this morning they appear to have thrown in the technical towel and decided to love the coffee market once again. Normally when these funds are short, we see that roaster pricing gets ahead of producer selling which creates additional downward pressure when the producers are forced into the market. Now however, we are in much better balance and its been nice to see the producers gradually sell into the speculative buying taking advantage of the better prices. Brazil in particular has been a noted seller, often in the forward months, which allows them to take advantage of the forward curve not only in coffee (for example, September, 20 futures are 6 cents higher than March 20 at any time), but in the currency markets as well.

Speaking of currency, the Brazil Reis remained at a weak level last week mostly in the 4.24-4.26 range. The Central Bank of Brazil apparently thinks that this is a bit too much of a good thing and announced their intention to sell $7.5 Billion of reserves in an effort to strengthen the currency presumably willing to trade off export competitive advantage for inflation fighting power. If they succeed that will hurt the Brazilian coffee producers which is probably a reason, they sold coffee in the past week.

Meanwhile the beat goes on – on the heels of reduction in GCA stocks announced the previous week, the New York certified stocks which are reported daily continued a steady decline. Various reports out of Brazil and Vietnam indicated that November shipments would be less than the previous month and, even more so, the previous November (Brazil for example is down 33% compared to year ago through Nov 25, while Vietnam customs data indicates a 12% decline).

Before we get too over-the-moon bullish, it is good to pinch ourselves and remind ourselves where we are with respect to the next Brazil crop cycle. While a month or so ago there was some concern (hope?) that poor and irregular rains would reduce the potential size of the next crop, rains in fact did come proving once again the wisdom of Chauncy Gardner who famously predicted that “there will be growth in the spring.” While there remains concern about quality, quantity seems to be OK. Rabobank projected the next Brazil crop to be in excess of 66 million bags, in excess of last year’s record crop which coincided with a below $1 market, and while they tried to put a bullish spin on that, it’s hard to imagine how much price upside there into the teeth of 66 million bags. Our belief is that it is still too early to project the next crop – while the flowering may be an optimistic sign, let’s see what the fruit set looks like early in the new year which depends largely on continued steady rains between now and then.

We hope everybody had a great Thanksgiving week and gearing up for the December holidays. If we can help, please give us a call.

The Armenia Team