Investment funds are beginning to regain a taste for arabica coffee with a net short, or bearish, position shrinking fast as exchange stocks fall and the global market shifts into deficit. Arabica coffee futures have jumped since hitting multi-year lows in late January, partly because of brisk demand for certified stocks, compounded by speculative buying by funds.
"The drawdown in certified stocks is a trigger that could push the market quickly to the upside," said Romain Lathiere, fund manager with Diapason Commodities Management in Lausanne. In the latest US Commitments of Traders (COT) data released late on Friday, in the week ended February 2 speculators reduced their net short position for the second straight week, this time by a heavy 11,238 contracts, bringing it to a four-week low of 18,673 contracts.
"The reason for the substantial (short) covering over this period can be various - for example dollar weakness, the drawdown of New York certified stocks, potential for dryness in Colombia to affect the next crop," a senior European physical coffee trader said. ICE certified exchange stocks totalled 1,588,777 bags as of February 5, down from 1,727,703 at December 31 and 1,900,040 at October 30. Traders said washed arabica from several Latin American producing countries had been trading at large premiums to futures markets in recent weeks, due to tight supplies.
Dealers have expressed concerns over prolonged dry weather in washed arabica producer Colombia. Benchmark March arabica futures have risen by seven percent since January 20 when they touched a two-year low of $1.1105 per lb, weighed down by higher than expected arabica exports from Brazil. A Reuters survey produced a median forecast of a global coffee deficit of 3 million 60-kg bags in the 2015-16 crop year, which ends in September. That would be the first deficit since the 2009-10 crop year's shortfall.
Dealers have also noted a recent firming in the Brazilian real currency, which erodes incentives for arabica producer selling because it reduces local currency returns from sales of dollar-based coffee. Selling by arabica producers is expected to be light this week because of Carnival in top grower Brazil.