Large volumes of arabica coffee are about to enter ICE exchange warehouses, traders with knowledge of the matter said, further weighing on global prices that have already hit one-year lows.
The move to replenish ICE stocks removes one of the market’s last supports and may eventually provide consumers respite from high retail coffee prices which always lag moves on global commodity exchanges.
ICE arabica futures have been under pressure of late on concern that global economic growth is faltering just as top producer Brazil could potentially churn out a record crop.
However, ICE stocks – which have stayed between 1 and 5 million bags for the past two decades – are currently at 23-year lows around 380,000 bags, offsetting some of those concerns and leaving the market prone to volatility.
When stocks are low, traders buying futures contracts can have a greater impact on prices as there may not be sufficient coffee available to meet their demand so those who have sold futures may have to buy back their positions.
ICE exchange data shows that while stocks are critically low, more than 160,000 bags are currently sitting in warehouses waiting to be certified for delivery against futures contracts if they pass quality controls.
Traders say at least another 100,000 bags are on their way.
“If certified stocks start rising significantly there’s nothing bullish left in the market. They would have to rise by more than 200,000 bags though,” said a Europe-based trader at a global trade house.
Certified stocks are a strong driver of ICE coffee prices because, unlike other factors, they are visible to all on a daily basis and many algorithmic funds are pre-programmed to buy when they fall and sell when they rise.
The coffee crop in Brazil, responsible for around 40% of global arabica production, could grow by as much as 10% in 2023 due to favourable weather in recent months, analysts say.
That should push prices for exchange-grade Brazilian coffee, known as ‘semi-washed’, down to levels where it becomes economical to deliver the beans to ICE – a market of last resort at times when there is excess supply.
Traders said physical prices for Brazilian semi-washed coffee dipped in September to levels where exchange deliveries became economical, but the fall was short-lived, hence just 250,000 bags are at or heading to exchange depots to be certified this year.
Next year, those numbers could swell if the favourable weather in Brazil holds up and demand remains depressed due to the economic downturn.
“Demand is very, very quiet. No one wants to buy, roasters are stepping out the market. Whoever (has) coffee wants to get out so the only natural buyer is (exchange participants),” said another Europe-based trader.