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Coffee Market Report January 2014

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Overview
3-4
Brazil
5
Colombia and Peru
6
Monthly Coffee Exports Mild Washed Arabica Producing Countries (60kg bags) 6
Central America and Mexico 7
Robusta
7
Vietnam Shipments (PHYTO)
8
Arbitrage
8
Stocks
8
Funds
9
ICE Market Commentary
9
LIFFE Market Commentary
10
The Balance Sheet Across 2013/14 and 2014/15
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CONTENTS



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Coffee Market Report
January 2014
COFFEE DESK

London

James Hearn
JHearn@marexspectron.com

Keith Buers
KBuers@marexspectron.com

Thanh Ly
TLy@marexspectron.com

Kiki Van der Gucht
KVandergucht@marexspectron.com

Steve Pollard
SPollard@marexspectron.com

+44 207 491 6700

New York

Cary Waldman
CWaldman@marexspectron.com

Eric Corigliano
ECorigliano@marexspectron.com

+1 212 584 3879



OVERVIEW
Q4 shipments from Brazil were about 8.5 million bags, supporting the
growing consensus that the crop was at the upper end of expectations. We
have raised our 2013/14 crop estimate to 54.5m million bags (of which 39m
bags Arabica). At the same time, predictions for the 2014/15 crop have come
down owing to aggressive pruning and lower yields. The range of forecasts is
presently wide but we consider a fair consensus to be 55 million bags.
Although these two changes reflect a net reduction in supply of 2.5m bags, the
two-year global balance remains in surplus. Whether this surplus will be in
Robusta or Arabica will depend largely on the arbitrage which has been
extremely volatile since our last report.

Producers ability to hold back from selling in the face of new contract lows,
no doubt aided by delayed harvests in Vietnam and Central America,
provided a further catalyst for the short-covering rally. Systems and
discretionary managed funds, who were short a record 10m bags of Arabica in
early November, bought a little over 5m bags of Arabica and 4m bags of
Robusta by the new year. Index fund rebalancing will add 1.0 - 1.25 m bags of
buying by mid-January.

The Brazilian Government is consulting on repeating its Put Program in
March 2015 and even extending it from 3m bags to 5 m bags. It is our
understanding that this would only become reality if there are few or no
deliveries against this years Put Program. That is to say, the cumulative effect
over two years would be 3 or 5m bags. While this is very significant to the
market, it would be insufficient to swing the two-year balance into deficit.

Colombian shipments in Q4 came in at just under 3 m bags. This is about
50% higher than the same period last year, reflecting a crop that is both
large and early. This rate of shipments is unsustainable and registrations have
started to decelerate in January. Colombian exports are nonetheless expected
to average 750k bags a month for the remainder of the crop year. State
financial support for coffee farmers will continue in a changed format. This
will ensure good husbandry and picking of the next crop which is expected to
grow slightly to 10.75 m bags.

New crop shipments from Central America have got off to a slow start owing
to a delayed harvest and low carry-in stocks. Recent reports have varied
greatly as to the impact of Roya on total production in the region, particularly
in Guatemala and Mexico. Our understanding is that while certain local areas
have been devastated, total production in the region will be down by less than



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10%. This is because the biggest producer, Honduras, is likely to have an unchanged crop as new plantings
compensate for Roya loss. As early shipments have been so slow, exports from the region for the remainder
of the year are likely to be down by less than 100k bags a month compared to last year.

The Robusta market continues to suffer from an inverted price structure while stocks build in producer
hands and fall in consuming countries. This has been exacerbated by a delayed Vietnam harvest and
resistance by farmers to sell at low prices. The Vietnamese crop is big (28.8m of which 27.7 m is Robusta)
as are producer stocks. Shipments and deliveries to Ho Chi Minh have just started to accelerate. We would
expect monthly shipments from Vietnam to average 2.25 m bags for the remainder of the crop year. With
the upcoming Conillon crops (17m bags) and Indonesia (10.3 m bags of Robusta) fast approaching, we expect
the weight of hedge selling to pressure the market as H1 2014 progresses.

The short-covering rally has been the strongest since the start of the downtrend in 2011 and signals the
probable start of a bottoming phase. Index rebalancing should support prices in early January but we see
the Brazilian put level as a lid on the market (about 127/128 cts/lb NYC equivalent at todays differentials and
currency) and expect the weight of hedge selling to pressure the market as Q1 2014 progresses.

ICE spreads remain at full carry while the Liffe market continues in backwardation. The Liffe Exchanges
policy of intervention in the spot spread has been successful in ensuring orderly delivery periods but has
broken cash convergence - the consequence has been ever diminishing certified stocks. With certified
stocks currently standing at 2,820 lots, this problem is coming to a head. We currently have a natural,
modest, inversion, but to date this has proved insufficient to break the basis and bring fresh coffee to the
board. We believe that stocks will continue to draw over the coming weeks and months and may approach
zero. Under this scenario, even the exchange will be powerless in preventing either H/K or K/N inverting
further to effect full cash convergence. System fund buying started about two weeks earlier in Robusta than
in Arabica which caused extreme movements in the arbitrage. The second month arbitrage narrowed to
below 30 cts/lb before the flat price buying switched to Arabica and the arbitrage strengthened back to over
45 cts/lb.























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Brazil
Q4 shipments were about 8.5 million bags supporting the growing consensus that the crop was at the
upper end of expectations. We have raised our 2013/14 crop estimate up to 54.5m million bags (of which
39 m bags Arabica) and anticipate total exports of 31.5 million bags.
Predictions for the 2014/15 crop, on the other hand, have come down significantly. Those who do field
surveys (and we do not) report more aggressive pruning in a low price environment. There is also evidence
of lower yields, despite good weather conditions, as the trees suffer fatigue following two bumper years. We
put the current consensus at 55 million bags, and will follow up-coming reports closely to see if a further
downward revision is necessary.
At the time of writing, it is still attractive for Brazilian producers to deliver to the Government in March at a
price of 343 R/bag. But the weaker Real and firmer farm gate prices are narrowing the gap between NYC and
the producer puts. We estimate that about 3m bags of hedge selling would enter the market if prices are in
the upper 120s in February.
The Government is consulting on repeating the Put program in March 2015 and even raising it from 3 million
bags to 5 million bags. The cumulative retention of 8 million bags would push our global balance of available
Arabica well into deficit. However, our understanding is that this second Put program is highly unlikely if
there are large deliveries in March 2014. That is to say, the cumulative impact would be unlikely to exceed 3
million bags over two years, which leaves the Arabica balance in surplus.
In the first few months of the crop year, the price spread between Brazilian qualities moved considerably,
with Fine Cup moving to a large premium over Good Cup and lower grade Arabicas becoming cheaper than
Conillon. While the premium for Fine Cup remains high. The other spreads have reverted to more
historically normal levels in December. At todays prices, we expect Conillon to regain share in the
domestic industry.















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Colombia and Peru
Q4 exports from Colombia at just a fraction below 3 million bags were about 50% higher than the same
period in 2012 reflecting both a large and early crop. This rate of shipments is unsustainable and has
started to decelerate in January. Nonetheless, indications are for a big Mitaca and we estimate another 7.5
m bags will be shipped over the remaining 10 months of the coffee year.
The Government has announced that it has set aside the equivalent of USD 2 billion in its 2014 budget to
finance agriculture. Of this, 0.5 billion has been allocated to the coffee sector. The Finance Minister has
suggested that this subsidy be paid on a per hectare basis. This proposal would effectively penalise efficient
producers that have a higher yield per hectare but will prove popular amongst the many smaller farmers
ahead of the elections in May 2014.
Based on an annual production of 10.5 million bags, this subsidy equates to about 36 cts/lb which would be
slightly less than the present subsidy but would suffice to cover the marginal costs of production and would
ensure adequate husbandry. Our sources suggest that a crop in the region of 10.5 - 11 million bags is realistic
for 2014/15 which is considerably below figures we have heard from the FNC.





Source: Anacafe
COLOMBIA PERU MONTHLY TOTAL COSTA RICA EL SALVADOR GUATEMALA HONDURAS MEXICO NICARAGUA DOM REP MONTHLY TOTAL
Oct-12 582,067 591,187 1,173,254 34,889 36,094 129,491 47,595 232,995 183,767 4,477 669,308
Nov-12 732,508 554,375 1,286,883 46,072 34,826 140,501 98,722 241,942 176,424 15,376 753,863
Dec-12 786,637 450,000 1,236,637 100,129 75,286 140,369 343,080 174,057 60,576 11,701 905,198
Jan-13 743,104 178,470 921,574 136,991 117,246 265,806 639,669 237,717 100,506 19,704 1,517,639
Feb-13 718,540 145,700 864,240 152,621 137,730 344,236 581,548 365,329 118,063 3,259 1,702,786
Mar-13 676,601 125,043 801,644 164,034 147,738 383,758 659,038 344,906 180,177 8,794 1,888,445
Apr-13 685,652 59,844 745,496 205,592 127,571 435,587 589,347 387,867 268,439 7,642 2,022,045
May-13 854,772 175,343 1,030,115 180,480 128,974 467,439 503,050 316,641 221,615 7,866 1,826,065
Jun-13 664,641 324,987 989,628 148,522 101,969 424,720 453,115 334,899 212,988 8,694 1,684,907
Jul-13 786,346 523,087 1,309,433 127,254 124,699 375,054 230,720 280,711 163,760 5,747 1,307,945
Aug-13 930,509 710,743 1,641,252 63,918 83,132 356,865 144,258 231,208 159,861 5,781 1,045,023
Sep-13 673,851 654,559 1,328,410 37,672 45,030 243,082 49,879 198,248 82,561 5,623 662,095
Oct-12/Sep-13 8,835,228 4,493,338 13,328,566 1,398,174 1,160,295 3,706,908 4,340,021 3,346,520 1,928,737 104,664 15,985,319
COLOMBIA PERU MONTHLY TOTAL COSTA RICA EL SALVADOR GUATEMALA HONDURAS MEXICO NICARAGUA DOM REP MONTHLY TOTAL
Oct-13 877,482 658,805 1,536,287 31,972 37,487 80,771 39,015 168,338 39,775 8,722 406,080
Nov-13 1,062,000 574,583 1,636,583 41,275 19,066 74,560 56,349 200,000e 33,819 14,000 439,069
Dec-13 1,010,000 500,000e 1,510,000 64,784 na 137,589 344,094 na na na 546,467
Oct-13/Dec-13 2,949,482 1,733,388 4,682,870 138,031 56,553 292,920 439,458 368,338 73,594 22,722 1,391,616
Monthly Coffee Exports - Mild Washed Arabica Coffee Producing Countries (60kg bags)



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Central America and Mexico
A delayed new crop and aggressive competition from Colombia has meant marketing of the 2013/14 crop
has got off to a slow start. While certain areas have been devastated by Roya, sources on the spot suggest
that total production in Guatemala and Mexico will not be impacted as much as some reports suggest and
that new plantings will keep Honduran production almost unchanged. Across the region, we continue to
work with a decrease in production of about 8% and reduction in exports of about 12%, owing to the lower
carry-in stocks.
Q4 shipments are about 40% down on 2012. Assuming total exports of about 14m bags, this would indicate
that the region would still be in a position to export 1.4 m bags in the remaining nine months of the coffee
year, which would be less than 100k bags below the same period in 2012/13.

Robusta
The Robusta market continues to suffer from an inverted price structure while stocks build in producer
hands and fall in consuming countries. Intervention by the Exchange has meant the spot month has
repeatedly reverted to a discount prior to delivery, effectively relieving the shorts of their contractual
obligation to deliver. While this policy has succeeded in ensuring orderly delivery periods, it has failed to
facilitate the transfer of stocks from producers and caused a prolongation of the inverse price structure. But
stocks are at critical levels and are set to fall still further. We believe that either H/K or K/N will invert further
in order to achieve full cash convergence and facilitate the transfer of stock from producer to consumer.
Rains in Vietnam and the resistance on the part of producers to sell at low prices have combined to delay
the arrival of physical coffee to the market. Vietnamese Q4 exports of just 4.3 m bags are down 1.6 m bags
on last year. The consensus suggests that this years Vietnam crop will be about 4.5 million bags larger than
2012/13 and this comes on top of high producer stocks. Shipments and deliveries to Ho Chi Minh have
started to accelerate rapidly with stocks at the port doubling from a very low level to 1.845 m bags in
December. This will continue at a high level for the rest of the year. More importantly, much of this physical
trade appears to be unpriced which is decidedly bearish for the futures price. On top of this selling, large
Robusta crops are expected in both Brazil (17m bags conillon) and Indonesia (10.3m bags).
We saw little evidence of Conillon taking advantage of the premium nearby months on Liffe to sell their
carry-over stocks and this has been confirmed by the Oct/Nov shipments of just 165k bags. We expect
shipments to pick up as the new crop arrives on top of the carry-over stocks. In contrast to Brazilian Arabica
farms, there does not appear to be the same heavy pruning or lower yields in the Conillon areas. New
plantings over the past 5 years have increased potential production to as much as 20 m bags. With excellent
weather so far this year, the consensus is for a crop of 17m bags, with some even higher.








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Arbitrage
The second month arbitrage narrowed to less than 30 cts/lb before reverting to over 45 cts/lb as system
fund buying came first into the Robusta market and later into Arabica.
The question of substitution on the part of industry, and its impact on the Robusta and Arabica balance
sheets, remains a moving target. In Q4 2013 there will have been some substitution as lower grade Arabica
differentials and a narrow arbitrage made a switch away from Robusta attractive for some roasters. With
todays prices, this situation has reversed but this situation remains fluid.
As previously discussed, we are friendly to nearby LIFFE structure and should New York come under pressure
in the short term, we would expect the arbitrage to tighten, and possibly sharply.

Stocks
The Green Coffee Association stocks show US stocks virtually unchanged on the year at 5 m bags. While
this figure is not broken down between Arabica and Robusta, we expect the increase in ICE certifieds to 2.7m
bags reflects a decrease in Robusta stocks in the US. At the same time, we estimate European stocks to have
fallen by about 1 m bags to 8.5m bags. Most of this decrease has been in Robusta which we estimate to be
just 1.8m bags in Europe, of which 0.5m bags are Liffe certified. Ho Chi Minh stocks are down 900k bags on
the year to 1.845m bags.
At the same time there has been a build-up in producing country stocks, particularly in Brazil and Vietnam.
While it is tempting to think there may be a structural change at play, whereby financially stronger producers
are choosing to carry coffee close to home, where the costs of carry are cheap, we think a more probable
scenario is that big shipments will take place before the end of the crop year leading to an increase in stocks
by about 3 m bags in Europe and Ho Chi Minh combined, while US stocks remain little changed. As most of
this coffee is as yet unpriced, it will have a negative impact on futures prices.
Vietnam Shipments (PHYTO)



2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14

Oct 1,166,667 1,000,000 808,333 1,360,183 790,383 1,010,428 1,116,667 970,217 1,964,747 1,203,893

Nov 1,000,000 916,667 1,166,667 1,050,000 950,000 1,075,837 1,277,883 1,238,167 1,869,625 1,180,313

Dec 1,500,000 1,333,333 1,666,667 1,646,667 2,316,667 1,699,412 1,600,000 1,983,883 2,079,168 1,909,823

Jan 1,500,000 1,083,333 2,716,667 2,019,633 2,016,667 1,807,217 2,000,000 1,927,088 2,719,750 0

Feb 1,333,333 1,000,000 1,750,000 1,416,667 2,083,333 1,366,667 1,400,000 2,749,075 1,734,117 0

Mar 1,666,667 1,666,667 2,250,000 1,583,333 2,316,667 1,889,167 2,314,833 2,651,817 2,355,063 0

Apr 1,416,667 1,333,333 2,039,150 1,450,000 1,900,000 1,833,333 2,423,717 2,283,333 1,725,437 0

May 1,333,333 1,666,667 1,732,100 1,354,750 1,405,500 1,541,003 1,727,150 2,788,047 1,972,423 0

Jun 1,250,000 1,250,000 1,389,533 1,200,333 1,333,333 1,531,262 1,335,293 2,123,333 1,354,288 0

Jul 1,250,000 833,333 1,343,900 1,123,667 1,067,983 1,342,600 1,217,771 1,970,610 1,599,033 0

Aug 1,166,667 1,583,333 1,179,233 972,433 1,074,783 1,400,000 1,287,977 1,796,358 1,533,960 0

Sep 916,667 750,000 937,850 857,450 1,019,250 1,169,733 1,209,117 1,518,967 1,179,268 0

15,500,000 14,416,667 18,980,100 16,035,117 18,274,567 17,666,660 18,910,408 24,000,895 22,086,880 4,294,030

*60kg Bags




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Funds
After establishing a record net short position of about 10 m bags of Arabica at contract lows, systems and
discretionary managed funds bought back a little over half of this by early January. The number of fund
participants has now dropped to its lowest level in over two years.
In Robusta, funds bought about 4m bags to leave their net involvement (excluding Index Funds) about
square.
Much of the price development in Q1 2014 will depend on the actions of this sector. A sustained move
higher will require funds shifting to a net long position.
The fund position (excluding about 1.5m bags of Index fund longs) is about square on Liffe (we estimate
systems funds are about 1m bags long and discretionary funds are about 1m bags short). Of this position,
the systems are most price-sensitive which suggests they will compete with origin to sell in a falling market.
At the time of writing, we expect to see net buying of about 1.0 - 1.25m bags of Arabica from Index funds by
mid-January. This should ensure an increase in traded volumes and open interest. The price impact will
depend largely on how much buying other participants have already done in anticipation.
We expect Index funds to carry about 14-15m bags of Arabica in H1 2014 and about 1.3-1.7 m bags of
Robusta.

Market Outlook ICE
We believe that the market has broken the down trend and is entering a long drawn out bottoming phase,
whereby short-covering rallies offer selling opportunities and levels approaching the lows should provide
buying opportunities. This view is backed up by recent crop reports which have greatly reduced the physical
surplus.
On a short term view we expect, following a quiet December, that the Index fund rebalancing in January will
generate an upsurge in traded volume. This Index Fund buying, coming at the end of the longest short-
covering rally since the bear market started in 2011, should provide a good opportunity for origin to price
their coffee. We would expect strong resistance in the upper 120s as the Brazilian Put program, which was
originally designed as a floor to the market, will effectively become a ceiling.
This phase could potentially last some time while demand slowly catches up with supply. The earliest visible
catalyst for change, barring a weather incident, would come if the Brazilian Government were to commit
unequivocally to a Put program of 5 m bags in March 2015.
At the time of writing we would look to sell the market, not because we are bearish but because we consider
the price to be in the upper end of a 105 130 cts/lb range for Q1 2014 basis the second month.







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Market Outlook LIFFE
The window for Vietnam to price their sales before the arrival of the next Indonesian and Conillon crops is
narrowing and all three origins are expected to produce large crops. The fund position (excluding about
1.5m bags of Index fund longs) is about square on Liffe (we estimate systems funds are about 1m bags long
and discretionary funds are about 1m bags short). Of this position, the systems are most price-sensitive
which suggests they will compete with origin to sell in a falling market.
At the time of writing we consider the price to be in the upper end of a USD 1800 1400 range for H1 2014
basis the second month. However, the extremely low certified stocks mean the risk of a single-month spike
through the upper side of this range is a serious possibility. The market is difficult to read, in that we are
going from balance (but producers withholding stocks), into what should be a decent surplus, and current
prices are substantially above cost of production. With consumer stocks as low as they are, it is difficult for
us not to be constructive nearby, however, this view changes dramatically the further forward we go in time.


The Balance Sheet across 2013/14 and 2014/15
Supply
12/13
Supply
13/14
Supply
14/15
Brazil 55.25 54.5 55.0
Vietnam 24.25 28.8 26.7
Colombia 9.5 10.5 10.75
Costa Rica 1.6 1.4 1.4
Cote dIvoire 1.5 1.6 1.6
El Salvador 1.3 1.0 1.0
Ethiopia 4.7 5.2 5.0
Guatemala 3.6 3.3 3.5
Honduras 4.7 4.4 4.6
India 5.3 4.9 5.25
Indonesia 12 10.8 12.0
Malaysia 1.0 1.0 1.0
Mexico 4.5 4.2 4.2
Nicaragua 1.7 1.6 1.5
China 1.1 1.4 1.6
Tanzania 1.2 1.0 1.0
Papa New Guinea 0.7 1.1 1.1
Peru 4.3 4.2 4.4
Uganda 3.7 3.7 3.7
Others 8.9 8.4 8.2

Total: 150.8 153 153.5

Demand
12/13
Demand
13/14
Demand
14/15
Total 143.5 147.5 151.6

Balance +7.3 +5.5 +1.9




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