Coffee Market Research | 13 th May 2019

London: Georgi Slavov, Dr Giacomo Masato, Dr Georg Ritter, Steve Pollard, Eleanor Taylor (+44 (0) 207 655 6000) | Singapore: Hui Heng Tan (+65 (0) 6413 0046)
Research & Analysis 13 May 2019

Thought of the Week

Cross-Commodity Correlation Matrix
 This week we analysed the relationship between the coffee market and 10 different
commodities: 5 agricultural (Corn, Soybean, Wheat, Cocoa and Sugar) and 5 non-
agricultural (Iron Ore, Coal, Oil, Natural Gas and Silver).
 We simply employed cross-commodity correlation analysis on daily data from the past
24 months, with a perfect positive/negative relationship reflected by a correlation
coefficient of +1/-1 respectively, and 0 indicating no association. The correlation matrix
is displayed in Figure 1.
 As we can see, the strongest relationship was discovered between coffee and sugar
prices, which demonstrated a high, positive correlation coefficient (r) of +0.85. This
almost symbiotic relationship could be attributable to the markets’ shared reliance on
Brazil, a key producer of both sugar and coffee. Therefore, factors that affect Brazilian
production, such as the BRL/USD exchange rate and underlying weather conditions,
will likely influence the price formation of both agricultural markets.
 Figure 2a displays the evolution of the relationship between the coffee and sugar
market since June 2017 using a 30-day rolling correlation. As expected, the correlation Figure 1. Source: Bloomberg; Marex Spectron Research
coefficient between sugar/coffee remained in positive territory for the majority of the
time period. However, the long-term trend (see red dashed line) reveals that the The Relationship between Coffee and Sugar Prices
relationship between the two agricultural markets has been weakening, especially in 1 175¢ 17¢
2019 (see green shading). Indeed, Figure 2b shows that the markets have started to 0.8 165¢
16¢
diverge since the beginning of the year, with sugar prices largely bound by the ‘ethanol
0.6 155¢
parity range’ between 12-14c and coffee prices declining as the market continues to 15¢
0.4
struggle with oversupply, particularly in arabica. 145¢
0.2
 Looking at the non-agricultural commodities, the strongest relationship was discovered 135¢ 14¢
0
between the coffee and silver markets (r=0.77). Another relationship that surprised us 125¢ 13¢
what that of coffee and iron ore (negative correlation; r=-0.53). Again we hypothesize -0.2
115¢
that this result is largely due to both markets sensitivity to Brazil as a key supplier, but -0.4 12¢
also their reliance on a number of key Asian nations such as Japan and China. 105¢
-0.6
11¢
 This research has demonstrated that further investigation into the common underlying -0.8 95¢
factors and lead/lag relationship between coffee and other commodity markets will -1 85¢ 10¢
enhance our understanding of the drivers affecting the coffee market, and the Jun-17 Nov-17 Apr-18 Sep-18 Feb-19 Jun-17 Dec-17 Jun-18 Dec-18
performance of our proprietary systematic fundamental model. Coffee C Sugar no.11
Figure 2 (a+b). Source: Bloomberg; Marex Spectron Research

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 Short-term Fundamental Market Conditions 13 May 2019

Short-term Supply Short-term Demand Short-term Macro

 Global exports for March came in at 10.98m bags. This is
up 0.7m on February 2019 but down 0.44m on March
2018. Y-t-D shipments are still 2.51m bags ahead of last
year.
 Brazil shipped 3.18m bags in April. Current Y-t-D
shipments stand at 34.1m bags with two months of the
crop year remaining.
 Sumatran exports dropped to just 72k bags in April (50%
down on April 2018). This figure should start to rise as
new crops arrive this month.
 Ho Chi Minh stocks declined to 4.67m bags in April,
which is in line with seasonal tendency. This is down
0.7m on end March.
 Type 6. Arabica declined by 8 to Rs/bag 380 spot SDM
and Robusta slipped by 3 to RS/bag 272 spot ES.
Vietnam dropped by 300 to Dg/Kg 30,900 spot Dak Lak.
 The COT reports showed continued non-commercial
buying of Arabica (1.4m bags on the week). There has
been very little speculative interest in Robusta which
saw net non-commercial buying of just 80k bags.
 The US dollar consolidated the previous week’s gains in
a tight trading range. The BRL and COP both went out
about 0.1% cheaper at 3.0375 and 3,235. Our Currency
Impact Index, displayed on the chart below, remains in
bearish territory for coffee prices.
 It was a negative week for all the commodity categories,
with metals, energy and AGS all down. Coffee was in
the lower quartile with only OJ and sugar performing
worse.

 Indian exports came in at 0.6m bags in April. This is down  Certified stocks have been sidelining since the start of
0.15m on March 2019 and down 68k on April 2018. Y-t-D the year. We expect an increase in Honduras and
exports are down 0.39m on 2018. Conilon gradings in the Summer.

In millions of bags Brazil Exports Certified Stocks Currency Impact Index

4.5 3.0 155¢ 0.03

4.0 145¢
2.5 0.02

3.5 135¢
2.0 0.01

3.0 125¢
1.5 0
2.5 115¢

1.0 -0.01
2.0 105¢

0.5 -0.02
1.5 95¢

1.0 0.0 85¢ -0.03

Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Oct-17 Dec Feb Apr Jun Aug Oct Dec Feb Apr 1 5 9 13 17 21 25 29 33 37 41 45 49 53 4 8 12 16 20
2018 2019
2016/17 2017/18 2018/19 5 yr ave Arabica Robusta CURRENCY IMPACT INDEX COFFEE C
Source: Cecafe; Marex Spectron Research Source: ICE Exchange, Marex Spectron Research Source: Bloomberg, Marex Spectron Research

3
Short-term Market Outlook & Systematic Fundamental Model Track Record 13 May 2019

Proprietary Trading Algorithm Signal Cumulative Live Return

$150 5 18%

4
$140 15%
3

2
$130 12%
1

$120 0 9%

-1
$110 6%
-2

-3
$100 3%
-4

$90 -5 0%
01Jan 01Feb 01Mar 01Apr 01May 01Jun 01Jul 01Aug 01Sep 01Oct 01Nov 01Dec 01Jan 01Feb 01Mar 01Apr Dec-2018 Jan-2019 Feb-2019 Mar-2019 Apr-2019
SIGNAL COFFEE

Signal published Market stance Price @ publication Price @ reversal Holding period Result
09-Jan-18 LONG 125.15 124.95 20 -0.16% Annual Statistic
29-Jan-18 SHORT 124.95 121.40 21 2.84%
19-Feb-18 LONG 121.40 119.95 15 -1.19%
In-sample

06-Mar-18 SHORT 119.95 117.55 30 2.00%

05-Apr-18 LONG 117.55 113.85 42 -3.15% Year Return Result Definition
17-May-18 SHORT 113.85 108.70 56 4.52%
12-Jul-18 LONG 108.70 108.75 25 0.05%
06-Aug-18 SHORT 108.75 98.80 32 9.15%
07-Sep-18 LONG 98.80 122.05 41 23.53% 1st Jan - 7th Sept 2018 14.06% In-sample
Sample
Out-of-

18-Oct-18 SHORT 125.85 106.90 47 15.06%

04-Dec-18 SHORT 106.90 103.05 8 3.60%
12-Dec-18 LONG 103.05 102.75 33 -0.29%
14-Jan-19 SHORT 102.75 103.95 4 -1.17%
24 Jan 19 LONG 103.95 106.30 10 2.26% 7th Sept - 4th Dec 2018 38.59% Out-of-sample
28-Jan-19 SHORT 106.30 97.95 21 7.86%
18 Feb-19 SHORT 101.65 99.85 14 1.77%
04-Mar-19 LONG 99.85 98.70 3 -1.15%
07-Mar-19 SHORT 98.70 97.80 4 0.91%
Live

11-Mar-19 LONG 97.80 97.65 3 -0.15%

14-Mar-19 SHORT 97.65 97.40 4 0.26%
18-Mar-19 LONG 97.40 94.90 2 -2.57%
21-Mar-19 SHORT 94.90 92.90 7 2.11% 4th Dec 2018 - to date 10.30% Live
28-Mar-19 LONG 92.90 90.40 18 -2.69%
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*Recommendation remains open

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London: Georgi Slavov, Dr Giacomo Masato, Dr Georg Ritter, Steve Pollard, Eleanor Taylor (+44 (0) 207 655 6000) | Singapore: Hui Heng Tan (+65 (0) 6413 0046)