Expert Call: Coffee Outlook in 2015 and Beyond

On Thursday, August 21st, we hosted a call with Judith Ganes-Chase, founder and president of J. Ganes Consulting, an independent agricultural softs commodities research and consultancy firm. Judy worked on the sell-side for 20 years before founding J. Ganes Consulting in 2001. A replay link to the call is included below with a brief summary:


Call Replay


Judy acknowledged that Brazil has a cyclical pattern of coffee production (one year up, one year down). However the scale of Brazil’s shortfall in the coming years will be unprecedented: She emphasized that this is the first time we are looking at a two-year production deficit.

Judy proceeded to outline three unusual weather scenarios that occurred earlier this year:

  1. Late Winter Frost: Brazilian winter (November-December) mild frost lowered crop quality
  2. Severe Drought: Drought and lack of moisture in tree root system from January-March during the vegetative period
  3. Heavy Rainfall: Late timing of heavy rainfall knocked flowers off trees, reducing the available volume for harvest
  • In her prediction prices could easily move much higher: Brazil will not produce enough volume in 2015-2016 to meet the global market demand for Arabica coffee.
  • Consensus expected 53-64 million bags of Arabica to be produced, but less than 46 million bags will come out of Brazil this year.  
  • Dire outlook into next year: Next year aggregate demand is expected to be around 34 million bags. However due to a current stock deficit and severe crop damage, Brazil’s production yield will be just 27 million bags in 2015.
  • Nobody to pick-up the slack: Not enough capacity from other countries to cover the expected crop shortage of Arabica coffee in Brazil.
  • How High Can Prices Go?: $2.75 to above $4.00/kg. There will likely be a spike in prices for Arabica, and a higher basis for other grades of coffee. We can expect some read-through after the assessment of the third or fourth bloom in the coming weeks.

Please feel free to reach out with additional questions.


Ben Ryan


Commodities Weekly Sentiment Tracker

Note: Using the z-score in the tables below as a coefficient of variation for standard error helps us flag the relative positioning of the commodities in the CRB Index. It is not intended as a predictive signal for the reversion to trailing twelve month historical averages. For week-end price data, please refer to “Commodities: Weekly Quant”  published at the end of the previous week. Feel free to ping us for additional color.    


1.       CFTC Net Futures and Options Positioning For Commodities in the CRB Index: The U.S. Commodity Futures Trading Commission (CFTC) releases “Commitments of Traders Reports” at 3:30 p.m. Eastern Time on Friday afternoons. The release usually includes data from the previous Tuesday (Net Positions as of Tuesday Close). The table below includes the net positions of “non-commercial” futures and options participants. A “Non-Commercial” market participant is defined as a “large speculator.” We observe the weekly marginal changes in the overall positioning of “non-commercial” futures and options positions to assess the directionally-biased capitulation risk among those with large positions.

  • The copper, sugar, and soybean markets are positioned shorter through Friday’s release. The market took comments from Yellen and Draghi at last week’s symposium as USD bullish and bearish for Gold which is currently testing its @Hedgeye $1271 Trend line of support. Gold has sold off ~-1.5% over the last week and we anticipate a market that is relatively shorter week-over-week when new contract data is published on Friday.
  • The coffee, cocoa, and orange juice markets were positioned relatively more bullish according to Friday’s report. The net-commercial length of both cocoa and coffee futures and options positions are sitting much longer than their trailing 1-year averages. we anticipate more producers have come to hedge cash market exposure with the uncertainty of the future crop in Brazil. Coffee is +65% YTD.

Commodities Weekly Sentiment Tracker - chart 1 CFTC w.w change

2.       Spot – Second Month Basis: Measures the market expectation for forward looking prices in the near-term.

  • The sugar, coffee, and corn markets are positioned for higher prices near-term. 
  • The soybean, lean hogs, and RBOB Gasoline markets are expecting lower prices near-term.

Commodities Weekly Sentiment Tracker - chart 2 spot 2nd basis

3.       Spot – 1 Year Basis: Measures the market expectation for forward-looking prices between spot and the respective contract expiring 1-year later.

  • The sugar, corn, and wheat markets reflect the expectation for higher prices 1-year in the future. 
  • The lean hogs, soybeans, and live cattle markets reflect the expectation for lower prices 1-year in the future. 

Lean hogs spot prices have already retreated ~-27% over the last month and are expected ~-18% lower in 1-year. We highlighted the recent developments of a potential game-changing vaccine to the PEDv virus that affected an estimated 5,000 farms in 30 states across the country. A link to that article from July 31st is included below:

All Time Highs in July: Hogs and Cattle

Commodities Weekly Sentiment Tracker - chart 3 Spot 1 Yr Basis

4.       Open Interest: Aggregate open interest measures the amount of opened positions in all actively traded futures contract months. Open interest can be thought of as the total sum of “naked” or “directionally-biased” contracts as opposed to hedgers scalping and providing liquidity. A majority of the open interest is created from large speculators or participants who are either: 1) producers/sellers of the physical commodity hedging their cash market exposure or 2) large speculators who are directionally-biased on price.

Commodities Weekly Sentiment Tracker - chart 4 Open Interest     


Ben Ryan



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Cartoon of the Day: Burning Euro

Takeaway: ECB chief Mario Draghi is evidently a bigger fan of monetary cowbell than previously imagined.

Cartoon of the Day: Burning Euro - bruning euro 08.25.2014

Draghi Trumps Yellen’s Dovishness – Sticking with the Playbook

Investment Recommendations:  short EUR/USD (FXE) and Eurozone equities (EZU);   Long GBP/USD (FXB)


As is customary, Jackson Hole affords central bankers the stage to make a “splash”, and the ECB’s Mario Draghi did just that, on Friday (8/22) solidifying the title of “über” dove, even beyond our expectations. 


What are the tea leaves indicating?  Accelerated QE expectations!   Draghi said “we stand ready to adjust our policy stance further.”  An acceleration in the “adjustment” towards QE is what we foresee out of the meeting and given the backdrop of deteriorating Eurozone fundamentals and in our estimation little prospect for medium term inflections from the TLTROs and QE-lite (ABS buying) programs. What initial indicators may begin to turn the tide?

  • We expect in aggregate that Eurozone Confidence figures for August (out this Thursday) to show sequential decline
  • We foresee the Bank to be unable to arrest the decline in inflation. CPI stands at 0.4% and the preliminary August reading (out this Friday) should show further contraction, likely by 10bps. Draghi is both way off base from the 2.0% LT target and showing a material inflection over the medium term
  • Sticky and high unemployment currently at 11.5% (the July reading comes out this Friday) should persist over the medium term
  • We expect the ECB’s staff projections  for growth and inflation to be revise down in its next meeting on September 4th

Taken together, we’re not calling for the announcement of QE next month, however we do think QE expectations will heighten as fundamentals continue to go against the Bank’s price stability mandate.



What cards has Draghi already seen that may influence his use of policy “tools”?

Eurozone Manufacturing PMI 50.8 AUG Prelim. (51.3 est.) vs. 51.8 prior

Eurozone Services PMI 53.5 AUG Prelim. (53.7 est.) vs. 54.2 prior

Eurozone Composite PMI 52.8 AUG Prelim. (53.8 est.) vs. 53.8 prior

Draghi Trumps Yellen’s Dovishness – Sticking with the Playbook  - x. pmis

  • German data remains lousy. Today’s release of the German IFO Business survey showed a material slide, and is in-line with German Q2 GDP that slid to negative (for the first time in two years at -0.2% Q/Q); as well as weakness from Factory Orders, Industrial Production, and Economic expectations seen over recent weeks.  For more see: Germany Under Pressure: ZEW Tanks

Germany IFO Business Climate 106.3 AUG (107.0 est.) vs. 108.0 prior

Germany  IFO Current Assessment 111.1 AUG (112.0 est.) vs. 112.9 prior

Germany IFO Expectations 101.7 AUG (102.1 est.) vs. 103.4 prior

Draghi Trumps Yellen’s Dovishness – Sticking with the Playbook  - x. ifo

  • Bond yields are front-running the slowdown in economic growth, with the German 10YR bund yield trading below 1%!

Draghi Trumps Yellen’s Dovishness – Sticking with the Playbook  - xx. yields




We’re sticking with the Hedgeye investment playbook we had going into the meeting, which includes:


-- Short EUR/USD (FXE). Net short position in the EUR/USD (CFTC futures + options) hits a big year-to-date high of -142,758 contracts.

Draghi Trumps Yellen’s Dovishness – Sticking with the Playbook  - x eurusd

Draghi Trumps Yellen’s Dovishness – Sticking with the Playbook  - x. cftc


--Short European equities (EZU) which, despite the recent bounce, remain below our TREND levels of resistance. If the equities overcome their TREND levels, we’ll change our positioning:


Equity TREND lines remain broken:

Europe’s Stoxx50 = 3,158

Germany’s DAX = 9,643

Italy’s MIB = 21,311

France’s CAC = 4,364

Draghi Trumps Yellen’s Dovishness – Sticking with the Playbook  - x. dax


-- Long GBP/USD (FXB) - BOE Minutes released last week showed for the first time in more than three years that there were 2 votes to increase interest rates (by 25bps). Taken together with the dovish policy from the Fed’s Yellen and ECB’s Draghi, and relatively stronger economic data from the UK, we expect the GBP/USD to appreciate in value.  

Draghi Trumps Yellen’s Dovishness – Sticking with the Playbook  - x. pound


Matthew Hedrick


Takeaway: New Home sales declined for a 2nd month in July. Rising inventory, middling demand & decelerating prices are not a bullish factor cocktail

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume. 





Today's Focus: July New Home Sales 

New Home Sales declined for a second straight month in July as the new Home market continues to spin its wheels, averaging ~425K +/- 25K each month for the last year.  The sales data continues to accord with the middling SF starts and permits figures while remaining at odds with the optimism fueled rise in builder confidence.   



Key Takeaways: 


* Total:  On the heels of the largest sequential decline of the year in June, New Home Sales dropped -10K ( -2.4%) sequentially in July to 412K SAAR.  New Home sales represented just 7.4% of total home sales in the latest month, the lowest share percentage since September of last year (see 1st chart below).   Existing Home Sales, while lackluster in its own right, continues to dominate the sales recovery as New Home Sales share of total remains depressed vs historic averages. 


* Regional:  With the exception of the South, all regions saw a sequential decline in sales with growth continuing to run negative on a YoY basis.  Notably, the Northeast and South saw a stark divergence in sales trends with MoM and YoY sales growth declining -31% and -44%, respectively in the Northeast and +8% and +33%, respectively, in the South.   


* Inventory:  The total inventory of new homes breached the 200K level for the first time since September 2010, rising +4.6% MoM to 205K.  Supply continues to trend higher on both a 1Y and 2Y basis. 


* Sales vs Sentiment:  Rising builder confidence reported in the August NAHB HMI catalyzed the strength in housing stocks to start last week.  We’ve highlighted the decoupling of builder confidence, fueled in large part by rising “optimism, from the reality of actual new construction sales  the last few months.   Absent an inflection in sales trends, it remains more likely than not that builder confidence corrects in favor of the data in the coming month(s).  



Bottom Line:

Rising inventory, middling demand and decelerating prices is not a bullish factor cocktail.  Comps get easier from here on the demand side of housing but price comps get progressively steeper.  We’re considering the stock price implications of an (largely optical) increase in reported volume against easy compares but, as it stands, we’re inclined to maintain our bearish bias until we see the next inflection in the second derivative price trends. 

















About New Home Sales:

Each month the Census Department releases the New Home Sales report, which measures the number of newly constructed homes that have been sold in the month. The difference between the New Home Sales report and the Starts and Permits report is that New Home Sales only includes single family spec homes built and sold by builders, and does not include condos, apartments, or owner-built units. This is why New Home Sales typically run at roughly half the rate of Starts.



Joshua Steiner, CFA


Christian B. Drake


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