The competition for control over coffee inventories has increasingly revealed its crucial importance. For sellers, the strategy is simple: sell at the market price without hesitation. However, for buyers, particularly speculators in the futures market, this is a different matter entirely.
At the end of the week, the price of Robusta coffee on the London futures exchange spiked, saving an otherwise weak week for prices. The inventory of Robusta coffee in certified warehouses has continued to dwindle, while export prices from Vietnam remain high, leaving speculators unable to make a move.
Coffee Inventories: A Powerful Weapon
The battle for control over coffee inventories has become increasingly significant. For sellers, selling at a favorable price without delay is the norm. However, for buyers, especially those with speculative intentions in the futures market, it becomes more complicated.
On the Liffe NYSE futures exchange, speculators have often used strategies like “price squeezing” to push prices higher. By driving prices up for the nearby contracts, they create the leverage needed to store coffee in warehouses approved by the futures exchange. This practice has allowed speculators to accumulate significant amounts of certified coffee inventory, sometimes approaching 420,000 tons.
As a natural countermeasure, Vietnamese farmers have raised their export prices, reducing the amount of coffee available at competitive prices. As a result, the certified coffee inventory at Liffe NYSE warehouses has been shrinking. By October 15, 2012, the inventory had decreased by 10,830 tons, down to just 119,450 tons.
Meanwhile, on the ICE New York Arabica futures market, the certified inventory has continued to grow. As of the last trading session, certified Arabica inventory reached 134,320 tons, surpassing the amount of Robusta coffee for the first time in the market’s history.
What Does Inventory Growth Indicate?
The increasing inventory indicates two things: first, Arabica prices are relatively low, making it less appealing for speculators to invest in, and second, like Robusta futures, Arabica could experience unexpected price movements if the certified inventory reaches a level that allows speculators to take decisive action.
So far, the control of inventories by speculators has yet to be proven as lucky or risky. Regardless, this phenomenon has helped maintain high Robusta prices over the years, especially in the past two years.
Looking at the inventories, Robusta stocks continue to decline, while Arabica stocks are growing. This dynamic is entirely driven by the price strategies of those controlling the coffee supply.
Inventory Reductions Lead to Price Increases
As prices had been declining for much of the season, Robusta futures on the Liffe NYSE fell during the week. However, on the last day, Friday, October 19, 2012, prices surged due to the news that certified inventories had fallen by nearly 10,100 tons over the past two weeks. This was seen as a positive signal for Robusta farmers.
The price closed 42 USD higher on the Liffe NYSE futures market, recovering the losses from the week and closing 11 USD higher than the previous week.
Meanwhile, local prices for raw coffee in Vietnam remained high during this period as it coincided with the “pre-harvest” season. Prices rose above 41,000 VND, compared to 40,000 VND per kilogram last week.
Export prices are also around 40 USD per ton under the market price for the 2.5% defective grade, which is quite high and likely to attract buyers aiming to increase inventory.