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Hedge funds trim down net-long bets on coffee as surplus hits 500%

Thursday, September 16, 2010
Opalesque Industry Update - Hedge funds are trimming down their long-only coffee bets on concerns that prices of the commodity will fall amidst a rising surplus estimated to reach 500% against global demands, various media reports said.

Coffee supplies may be peaking, a report by Bloomberg showed, and its biggest rally in five years may come to a halt and the predicted large volume of harvests are forcing many hedge funds to reduce their investments.

According to data released by ABN Amro Bank and VM Group, supplies of Arabica, the most grown coffee in the world, would exceed demand by 6.67 million 60-kg bags by September 2011. The figure will be the biggest surplus in nine years and is six times larger than the expected surplus this season, reported The Age.

Speculators including hedge funds have cut their net-long position, or bets on higher prices, by 8.4% since Aug. 17, said Bloomberg.

"You cannot justify the spike on the upside if you look at the supply situation," said Christoph Eibl, co-founder of Zug, Switzerland-based Tiberius Group, which manages more than $2bn in assets, told Bloomberg. "People who have been betting on coffee may lose. In the long run, fundamentals always overrule."

In August, the International Coffee Organization (ICO) reported that short-term coffee supplies are the biggest factor in driving up coffee prices.

ICO estimates the aggregate coffee production for this year's crop season would be about 120 million bags. The organization expects production to hit 133 to 135 million bags by 2011.

But this large volume is also seen to drive coffee prices down.

An independent survey made by Bloomberg amongst seven analysts showed the prices of coffee would reach an average $1.52 a pound in the fourth quarter, representing a decline of 20% against the prevailing market prices.

December delivery price for Arabica fell 0.65 cent, or 0.3%, to settle at $1.8915 on Monday in New York, declining for the third straight session.

Arabica had risen as much as 50% since June, partly on speculation that rainfall in Colombia would damage crops.

Insiders also believe that coffee harvest in Colombia will fall next year because of a plant-damaging fungus that is expected to hit coffee growers after the wet season. However, it is also expected that a huge volume harvest will be coming from Brazil next year, adding to the significant number of countries that will have normal production levels, said

This is not the first time that hedge funds were stung by hot coffee prices.

In June, hedge fund managers lost on their short coffee bets as the prices or Arabica hit a two-year high after an unidentified company demanded funds to make good on the futures contracts they had been selling. Arabica breached the 150c level on June on the Intercontinental Exchange in New York, its highest in more than two years.

- Precy Dumlao

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