A hedge fund selldown in arabica coffee accelerated to the fastest pace on record as rains buoyed hopes for Brazil’s 2023 crop, while economic concerns undermined demand expectations.

Managed money, a proxy for speculators, cut its net long in futures and options in New York arabica coffee by 21,889 lots in the week to last Tuesday, GrainPriceNews analysis of Commodity Futures Trading Commission data shows.

That represented the biggest weekly cut in the net long – the extent to which long bets, which profit when values rise, exceed short holdings, which benefit when prices fall – on data going back to 2006. It reduced the net long to an 18-month low of 12,072 contracts.

And it came in a week in which prices tumbled by 11.7%, in a correction fuelled by improved expectations for world coffee supply prospects, despite the continued rundown to 23-year lows in certified stocks held for delivery against New York arabica futures.

‘Large coffee crop’

“The good rains this October on the coffee producing regions in Brazil,” besides data from industry group Cecafe showing strong Brazilian arabica exports last month, “created a favourable environment for investors to knock ICE coffee prices down with force,” merchant Escritorio Carvalhaes said.

“The confused situation of the world economy aggravates and deepens the downward pressure” on prices, with worries over European and US recessions.

“Against this backdrop, and now amid the expectation of a large coffee crop in Brazil in 2023, coffee importers are buying the minimum necessary for short-term supply,” while keeping an eye on the weather in the South American country and the buoyancy of demand, the Brazil-based group said.

“Consumption tends to grow substantially” in the northern hemisphere winter.

‘Coffee seems undervalued’

Brazil’s Conselho Nacional do Café producers’ group noted forecasts for further rains this week in major coffee-growing areas including Minas Gerais, the country’s top arabica-growing state, as well as Espirito Santo, the biggest robusta producer.

However, it also cautioned investors against getting carried away in their 2023 Brazilian harvest hopes, with a La Nina in progress, which can cause weather upsets in the country, and hailstorm recorded damage to some plantations.

“La Nina has a negative impact on coffee production in Brazil where it tends to bring drier-than-normal conditions, and in Colombia where it brings heavier than normal rainfall,” Archer Daniels Midlands Investor Services said.

“Even with reports of good Brazilian flowering over the past few weeks, coffee seems undervalued at current price levels.”

The New York December arabica coffee contract gained 1.1% to 193.05 cents a pound on Monday, looking for its first winning session in nine.

‘Traders worry’

Hedge funds also proved net sellers in New York cotton in the week to last Tuesday, by 4,812 contracts, cutting the net long to a two-year low of 22,032 contracts.

“Traders worry that demand will be cut off if there is a global recession next year,” said ADM, with cotton, as an industrial commodity, particularly vulnerable to world economic fortunes.

In Chicago, managed money proved a seller of corn too, amid pressure on the market from the US harvest, as well as by a sluggish start to 2022-23 for US export sales of the grain.

However, soyoil proved popular, with hedge funds raising their net long by 13,990 contracts, the most in a year.

Sentiment in the soy complex has improved with the end of an Argentine sales splurge prompted by a concessionary exchange rate window, with vegetable oils helped by ideas of a run down in Indonesian palm oil inventories, spurred by strong Indian imports.

What does the huge arabica selldown mean for prices ahead? Click here for GrainPriceNews analysis.