Coffee Continues Its Run: Just how Bad is Brazil's Crop?

On August 21st we hosted an expert call with Judith Gaines of J. Gaines Consulting featuring her fundamental, non-consensus call that the outlook for Brazil’s crop into 2015-16 is much worse than expected. Coffee has remained in a BULLISH @Hedgeye TREND set-up for all of 2014 and spot prices have increased +8% since we hosted the call less than two weeks ago (+80% YTD).   


Coffee Continues Its Run: Just how Bad is Brazil's Crop? - JO Levels VF


Spot Arabica finished +4.4% yesterday after The International Coffee Organization (ICO) reported that cash market prices have been markedly-higher in recent days by Brazilian and Colombian farmers:

  • Brazil: $1.9050/lb.
  • Columbia: $2.2150/lb.

Most importantly we will continue to watch the change in cash prices from farmers over the next several weeks for a read-through on the severity of the tree damage as an indicator for the health of next year’s crop.

Here are a few of the key catalysts- which we expect to continue playing out over the next several weeks:

  • For the first time we are looking at a two-year production deficit vs. a normalized year-on, year-off production cycle:
    • Late winter frost last year: Brazilian November-December mild frost lowered crop quality
    • Severe Drought: Drought and lack of moisture in tree root system from January-March during the vegetative period
    • Heavy Rainfall: Late timing of heavy rainfall knocked flowers off trees, reducing the available volume for harvest (CURRENT CATALYST)
    • Brazil WILL NOT produce enough volume in 2015-2016 to meet the global market demand for Arabica coffee
    • End-User Risk: Possible to hedge price risk but a shortage in coffee to cover all deliverables is an un-hedgeable risk in 2015-16
    • Aggregate demand next year 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
    • Not enough capacity from other countries to cover the expected crop shortage of Arabica coffee in Brazil
    • How High Can Prices Go? $2.75-$4.00/LB. There will likely be a spike in prices for Arabica and a higher basis for other grades of coffee.
    • Outlook in Vietnam and Indonesia looks worse year-over-year with Columbia picking up part of the slack

Over the next several weeks we expect a continuation in analysts pointing to irrelevant catalysts including current weather patterns…  

One of the key differentiators for Judy’s argument vs. consensus reasoning as to why prices will increase is that the damage from poor weather has already been done. Here were some of the headlines yesterday after the ICO reported higher cash market prices:

  • “Less rainfall during the flowering period” (which is happening right now)
  • “Rains needed to aid coffee crop development seen delayed by two weeks”
  • “Weather affecting near-term Brazilian coffee outlook”

Why we will certainly be watching the change in expectations for the supply/demand outlook in the coming weeks, market activity has supported the move higher:


  • QUANT: Coffee remains BULLISH from a TREND Perspective with support at $34.08
  • QUANT: is the most bullish commodity in our TACRM model aside from the base metal complex which continues to ride the strength in China  
  • VOLATILITY: Coffee was up +7.8% last week with volatility bid near YTD averages on the move. The adjustment for implied volatilities suggests the market believes in the move:


Note:  The adjustment in upside skew (difference in implied volatility between at the money calls and out of the money upside calls) to the average relative implied volatilities despite the +7.8% move suggests the market is willing to pay the same value for the same relative upside price risk after a significant run.     


  • VOLUME: Aggregate volume last week on the move ~75% of 1/3/6-month averages which was consistent with summer-end volume trends in other commodity markets
  • VOLUME: +4.4% yesterday on healthy volumes:
    • +21% vs. 5-day avg.
    • -12% vs. 1m avg.
    • -2% vs. 3m avg.
    • -8% vs. 6m avg.
  • SENTIMENT: Forward Curve in Futures Market positioned for higher prices:
    • Sep-Dec. basis = +2.23%
    • 1-yr basis= +~6%
    • 2-yr basis=+~7%
  • SENTIMENT: CFTC data shows the market is moving to position itself behind this bull story which is the common herding mentality when a market runs. Sentiment gets more bullish on the run. We view this as contrary indicator, so it’s something we’ll watch. The data is based off of the net length of futures and options contracts:
    • +3.4% longer week-over-week
    • Market long +46K contracts or approximately 2x 6-month aggregate daily futures volume
    • Market long +1.48 standard deviations vs. trailing 12-month average contract length

Despite a market that is positioned for higher prices into next summer, Judy’s price estimate in the $2.75-$4.00/lb. range remains well above current consensus positioning. We expect more color on the potential crop devastation into October and November.

As always, please ping us with any comments or questions.


Ben Ryan



Takeaway: Our Mass Deceleration thesis is in full play and the stocks are all down. There is precedent for lower, however.

Chart of the day



The chart below displays the indexed 52 week trading range for the major stocks with Macau exposure:

  • Our Mass Deceleration thesis unfolded faster than we expected, driving the last two legs of the 6 month Macau bear market.
  • Yes the stocks are beat up but there is precedent for even lower prices – looking over the past 12 months, not all stocks are on their backs.
  • From this view, MPEL and SJM look the most beat up while WYNN, Wynn Macau, and MGM are still trading above the midpoint of their respective 52 week range.
  • We’re not there yet, but when we see fundamental stabilization or a catalyst emerge, Galaxy (0027HK) and LVS look the most interesting to us on the long side.

MACAU STOCK RANGES - stock prices

Keith's Macro Notebook 9/3: Russia | Oil | UST 10YR

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Retail – Big Sales Datapoint Today

Takeaway: Big 4.8% ICSC number, even adjusting for easy compare. If a retailer can’t smoke numbers today, then when? Good oppty to source some shorts.


Is it any wonder why even the poorest quality retailers are putting up great numbers? The general sales environment continues to remain strong in the US, with numbers for the week 4.8% higher than last year according to ICSC (index of 80 retailers excluding restaurant and vehicles).  That's the highest weekly rate we've seen in over 3-years. Compares vs last year were easy this week, but even looking at a 2-year run-rate the index is approaching highs for the year.   To be clear, US retailers should be killing it in this kind of environment. Most are. But for companies that but up questionable quality numbers (like KSS) but get rewarded anyway, we'd simply ask what they'll look like when this strength ends?


Retail – Big Sales Datapoint Today - 9 3 ECON chart1


Retail – Big Sales Datapoint Today - 9 3 ECON chart2


By comparison, Eurozone Retail Sales were also released this morning for July, and we're looking at 0.8% growth yy, which is down from +1.9% in June. Keep in mind, however, that sales for 2013 were below 2012 levels almost every month of the year.

Retail – Big Sales Datapoint Today - 9 3 ECON chart3

Mortgage Apps - August Anemia Complete

Takeaway: Purchase demand is tracking down 6% Q/Q with August data now all in.

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


*Note - to maintain cross-metric comparability, the purchase applications index shown in the table below represents the monthly average as opposed to the most recent weekly data point


Mortgage Apps - August Anemia Complete - Compendium


Today's Focus: MBA Mortgage Applications

The Mortgage Bankers Association today released its weekly mortgage applications survey data for the week ended August 29th.


The Composite index managed a +0.2% gain as the YTD low in rates continues to support marginal refi-activity.  Purchase demand declined -1.5% sequentilly with the index holding below the 170-level for an eighth straight week as the multi-decade dearth in demand persists to close out August. 


  • Demand Anemia, Week 8:  The purchase Index fell for the 4th time in 5 weeks, declining -1.5% WoW to 165.8 on the Index. This marks the eighth consecutive week at the 160-level and the softest demand streak since April of 1995.  Purchase demand remains down -12% YoY and is currently tracking -6% QoQ. 
  • Refi & Rates:   Refinance activity increased for a 3rd straight week, rising +1.4% sequentially alongside an incremental -3bps decline in the 30Y FRM contract to 4.25%.  Rates have declined -10bps over the last month and currently sit at their lowest level YTD. Refi activity remains down -26% YoY but continues to improve as we move through the easiest 2013 comps. 


We’ve discussed the regulation-catalyzed shift towards Nonbank origination and the potential challenge to intertemporal reliability and reported demand as measured by the MBA survey.  The WSJ and Inside Mortgage Finance (Here) reported that nonbank market share of mortgage originations have increased 6% to 23% in 1H14 vs. 17% in 1H13. While the MBA survey states that it covers 75% of all US retail residential mortgage applications, it does not count applications submitted through the broker/correspondent/wholesale channels.   


Under an assumption that the full 6% shift went uncaptured by the MBA survey and allowing for a lower pull-through rate (i.e originations to applications ratio) on non-QM loans, the demand decline moderates but the broader reality of ongoing softness in the housing market remains largely unchanged.  From here, demand comps across the MBA Purchase Application and Existing & Pending Home Sales series continue to ease.


Mortgage Apps - August Anemia Complete - Purchase   Refi YoY


Mortgage Apps - August Anemia Complete - Purchase Qtrly Ave


Mortgage Apps - August Anemia Complete - Purchase LT w Summary Stats


Mortgage Apps - August Anemia Complete - Purchase Apps 8Wk Rolling Ave


Mortgage Apps - August Anemia Complete - Composite Qtrly   YoY  


Mortgage Apps - August Anemia Complete - Composite LT w Summary Stats


Mortgage Apps - August Anemia Complete - 30Y FRM



About MBA Mortgage Applications:

The Mortgage Bankers’ Association’s mortgage applications index covers more than 75% of mortgage applications originated through retail and consumer direct channels. It does not include loans delivered through wholesale broker and correspondent channels. The MBA mortgage purchase applications index is considered a leading indicator of single-family home sales and construction. Moreover, it is the only housing index that is released on a weekly basis. 



The MBA Purchase Apps index is released every Wednesday morning at 7 am EST.



Joshua Steiner, CFA


Christian B. Drake

LEISURE LETTER (09/03/2014)



  • Sept 3:
    • MGM China (2282:HK) at Nomura China Investor Forum
    • Sands China Ltd (1928:HK) at Nomura China Investor Forum
    • MTN - expected ruling from Judge Harris in PCMR vs. Talisker
  • Sept 4:  MGM at Mizuho Investment Conference
  • Sept 6-8: China/Macau - Mid-Autumn Festival
  • Sept 8: MAR Analyst Meeting
  • Sept 9: 
    • GLPI & HPT at Wells Fargo Net Lease REIT Forum
    • EXPE & OWW at DB Technology Conference


BEL:PM (GGRAsia) reports indicated CLSA Ltd is pre-marketing the PHP8.7 billion (US$200 million) follow-on share sale to expand its investor base with the official book opening on September 22 and a listing date of October 2. Reportedly, CLSA Ltd is the sole global co-ordinator of the operation, while Credit Suisse and Macquarie are joint bookrunners

Takeaway: Widely anticipated since BEL's filing on July 22.


IGT (Macau Business) Gaming equipment suppliers LT Game Ltd and International Game Technology will together unveil a concept called the "Total Casino Solution" at this year’s Macao Gaming Show, which will take place from November 18 to 20 at the Venetian Macao casino-resort.

Takeaway: Could this be the next iteration of the systems business?


LVS (Korea Herald) recently proposed to the Seoul government the construction of “a truly iconic building” in Jamsil, the site of the 1988 Olympic Games main stadium located in the affluent southern Seoul area. It is close to the Hangang River that runs through the capital city with a population of over 10 million, and Lotte World Tower, a 123-story building currently under construction.  LVS proposed to moving the baseball stadium to another location in order to optimize the redevelopment potential of the Jamsil site as a leading international meetings, incentives, conferences and exhibitions destination. 

Takeaway:  Another MICE opportunity or something larger?


BEE – announced that it has closed a ten-year, $115.0 million limited recourse loan secured by the InterContinental Miami hotel.  The Company had recently repaid the $85.0 million financing previously encumbering the property. Under the terms of the agreement, the loan bears interest at a fixed rate of 3.99% and has a ten-year term.  Deutsche Bank Securities Inc. originated the financing.

Takeaway: This financing replaced the existing $85mm loan that encumbered the property.


DRH – announced two acquisitions for a total of $174.2 million. First, the newly constructed 282-room Hilton Garden Inn/Times Square Central located on 42nd Street between Avenue of the Americas and Broadway in New York for a purchase price of $127.2 million ($451,000/key). Second, the 106-room boutique hotel, The Inn at Key West in Key West, Florida, for a purchase price of $47.5 million ($448,000/key). As of June 30, 2014, DRH has $253.0 million of unrestricted cash on its balance sheet and no outstanding balance on its $200 million senior unsecured credit facility. 

Takeaway: DRH's most recent equity offering was for 20 million shares at $10.03 on July 10, 2012.  Given the recent stock price and now low levels of cash, we would not be surprised to see an equity offering - especially as we approach year end 2014.


HLT – announced "China Golden Week" promotion for mainland China and Hong Kong. The promotion will reward customers who book directly through Hilton Worldwide's portfolio of hotels in mainland China and Hong Kong with exclusive discounts as well as, offering HHonors membership points to our valuable members. China Golden Week promotion from September 1 to October 10, 2014, all fully prepaid direct bookings up to two days prior to arrival will enjoy up to 34% off at any participating hotels and resorts under Hilton Worldwide across mainland China and Hong Kong

Takeaway: Hilton attempting to capitalize on its vastly larger China lodging footprint during the all important Golden Week.


HOT – announced an agreement with Hainan Jianfeng Tourism Development Co., Ltd. to debut China’s first W Retreat and the second St. Regis resort on Hainan Island. Scheduled to open in 2019 and 2020, respectively

Takeaway: Hainan, once thought to be the next gaming mecca, is quickly becoming a new city for high-end executive offices and technology firms.


RCL – announced that it has entered into an agreement to sell its 1,814-passenger cruise ship Celebrity Century to Exquisite Marine Ltd., a holding company led by Royal Caribbean Cruises will continue to operate Celebrity Century until April 2015. 

Takeaway: A smart move by RCL on 2 fronts - allows them to get rid of an old under performing asset while establishing a JV to manage the ship's operations while also broaden its relationship with Ctrip, who's a powerhouse OTA in China. 


Tourism chief forecasts single-digit visitor growth (Macau News)

Macau Government Tourist Office (MGTO) Director Maria Helena de Senna Fernandes said she believes that in the next few years, growth in the number of visitor arrivals will remain in single digits.  She also said her bureau would be more focused on convincing visitors to extend their stay. Currently, visitors’ average stay amounts to just one day.

Takeaway:  Through July, Macau visitation has grown 8% ytd in 2014.  Changing the day trip perception of Macau will be difficult.


Macau International Airport – handled 520,000 passengers in August, 6.5% more than a year earlier and the most in any month yet. Macau International Airport Co Ltd says the airport handled 3,400 landings and takeoffs, 1.4% more.

Takeaway: The visitors are coming to Macau, but just not gambling as much.


Trump Plaza Atlantic City – New Jersey Division of Gaming Enforcement approved the closing to Trump Plaza and said the property can cease gaming operations at 6 a.m. Sept. 16, and that casino-cage operations should continue until 8 a.m.

Takeaway: The closing of the third casino in a mere two weeks.


China Economic Data - The non-manufacturing purchasing managers’ index (PMI) rose to 54.4 in August from 54.2 in July.  Additionally, the HSBC Holdings Flash PMI survey was 54.1 versus 50.0 in July.


Hedgeye remains negative on consumer spending and believes in more inflation.  Following  a great call on rising housing prices, the Hedgeye

Macro/Financials team is turning decidedly less positive. 

Takeaway:  We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.

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