Arabica coffee, mostly produced in Brazil, has risen to a 14-month high with adverse weather - drought during flowering followed by too much rain – driving the price higher at a time where the market is beginning to look for a post-pandemic pickup in demand. Rabobank’s respected softs analyst has raised his global coffee-deficit forecast for 2021-22 to 2.6 million bags, compared with a surplus of than 10 million bags the previous year.
Adding to the list of supporting factors we have the recent cold spell, both in Russia, Europe and most noticeable in the U.S. which has raised concerns about a reduced winter wheat crop due to winterkill phenomenon. Staying with the grains sector, last week the chief economist at the US Department of Agriculture told the annual Outlook Forum that grains and oilseed prices, despite record planting, will remain tight during the 2021-22 season. The tightest beginning stocks for corn, soybeans, and wheat in several years, and expectations of continued strong import demand from China will continue to underpin prices. Unless production surprises to the upside and China slows its rapid purchase programs.
The emerging tightness across key agriculture commodities has resulted in the average roll yield of holding a portfolio of 11 ag futures for one year, has risen to the highest level in at least a decade. Since 2014 and up until last year, the constant state of oversupply, helped create a market where spot prices were the cheapest on the curve. With spot prices now being bid up we have seen a return to backwardation. This development where the front month contracts trade higher than the next helps create a positive carry when rolling the expiring contract into a later dated contract at a lower price.