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Good morning,

Last night marked the beginnings of Hanukkah and we wish our friends who celebrate a joyous festival.  Tomorrow brings Christmas Eve and the celebration of Christmas, to our friends who do, we wish you all the joy of that season.

If you are traveling, please be safe.

As the calendar changes once again, from 2019 to 2020, we thank you all who are an important part of our lives.   Your friendship and support are never taken for granted here and in the New Year we promise to work even harder to show you just how important you are to us.

Note with the Holidays, our office and our logistics partners will have limited availability.  Christmas and New Year’s Eve we’ll have limited staff availability and the NY C market will close a little earlier at 1:05pm NY time though the settlement window will be unchanged (12:23-25).  AA’s can be posted until 1:35pm.

A quick note about last week’s market since it continued to be so volatile.  Monday reversed Friday’s lower move and ran stops above Friday’s high at 140.30 and gave us a new high late in the session.  Buying was almost exclusively spec, though some trade was noted probably in a hands up gesture to a market that refused to head lower.  Overnight the exchange raised margin levels and though that usually doesn’t have much effect on a spec driven market. Tuesday, we tried and succeeded to extend the range, but only briefly and again the market sold off, until Friday where the market consolidated and tried to get some stability back.  Here again today we’re lower, and the market feels a bit exhausted.   We’re watching some of our favorite indicators to see if the market might reverse yet again.

The COT showed once again, as expected, funds bought the market.  They ended the period long 54530 (up 3933) and short 16517 (less short 4999), for a total 8932 lots bought.  Trade mostly took the other side as origin extended their sales.  We even noted some tweets from semi-governmental agencies encouraging traders to do some of that.

A close below 126.00 today would probably start funds reversing at least the quicker systems.

We will end this little report with some shared information for you.  Our Dave Joelson was in Ethiopia recently and he wrote a little report that we’ll share with you now.  Dave would love to discuss it with you if it brings any questions.

In the meantime, we’re here to help if we can.

Dave’s Ethiopia report follows:

I spent about one week in Ethiopia visiting with 6 exporters and viewing key elements in the commercialization chain of Ethiopian coffees

  • 6 wet mills in Sidama A and B regions, Yirgacheffe, and Yirg/Kochere
  • 1 regional ECX lab in Hawassa, Sidamo (all coffees are subject to QC checks in one of about a dozen ECX labs, regardless of whether the coffee is traded on ECX)
  • ECX Trading floor – while no longer required to be traded on the ECX, the vast majority of Ethiopian coffee (well over 90%) trades in this manner
  • Final milling, cleaning, and blending process in the Exporter Horizon’s facility in Addis, which services an estimated 80% of Ethiopian Coffee as most exporters lack this capability
  • The government-managed CLU facility co-locacted with Horizon which provides the final quality approval of all coffees after the Horizon process (approval is required for export).
  • The final step in the process, movement of goods to Djibouti for shipment, I did not witness.

For those interested in more detail about how all this works, and more details of the trip, please do let us know and we can provide the full trip report.  Here are the highlights:

  • Ethiopia coffee industry is highly fragmented with 1.5 million growers and 350 exporters managing a 6 million bag crop of which about 3 to 3.5million bags are exported.
  • The crop this year will be flat to up overall versus last year, however, the Sidama areas we visited are down an estimated 30% and the crop is at least one month late.
    • The increase is primarily in the Djimmah/Limu/Lekempti areas which account for 40-50% of the crop
    • Excessive rains during harvest in Sidamo (30% of the crop including Guji) is slowing down the drying process, and earlier rains interfered with bean maturation
    • Yirg we heard a mixed picture but seems to be up except in Kochere
  • Prices to growers this year are about double last year at sky high levels most producers in the world would be thrilled with – in excess of the equivalent of $2/Lb green
    • But, with tiny farms that produce only 700 KG cherry/hectare – about a seventh the productivity leaders Brazil and Vietnam (who can produce 5 MT per hectare) – it amounts to an annual income of about $1200 (which equates to about $3,000 in purchasing power locally).  After all, 6 million bags from 1.5 million growers = 4 bags each (green) on average. This is just not a lot of money and many farmers are diversifying to Khat (a mild hallucinogenic) that can be harvested multiple times per year and therefore provides a steadier income stream.
    • The reconciliation of prices being paid to growers with world prices is the singular challenge facing exporters this year
  • Timing: There are actual laws in Ethiopia (a highly planned economy) that govern how early new crop coffee is permitted to ship:
    • Washed Coffee: starting Dec 1
    • Natural Coffee: starting March 1

This is not because of the timing of availability, but only because the government is desperate to capture the higher price of the washed coffee first and the foreign currency it brings

This year, most people believe that the washed coffee (from Sidamo, Yirg) will not be ready to ship in a big way until February. Whether the delays in the harvest will impact Natural coffee’s timing (and the percentage of coffee that is dry processed) remains an open question, but it seems like that “late is late” and we would be surprised if the naturals would ship in a big way before April or even May. The coffee infrastructure – trucking, warehousing, preparation in the Horizon facility, port operations – will be busy with the late washed Sidamo crop and the large Djimmah crop, and it seems likely that this must impact Sidamo naturals.

The Armenia Team