Special Coffee Report

Roaster/Exporter Armageddon Awaits Dead Ahead

October 10, 2014

1) 30% below normal vegetative growth and new nodal formation during January-March 2014 period

2) Dryer than normal June-October timeframe necessitating another year of above normal pruning

3) Widespread Premature Flowering in August has aborted due to lack of follow on rains

4) Excessive heat in October likely to cause additional stress and loss of cherry formation capabilities by further damaging the coffee trees root system

5) Longer range weather Models continue to show a below normal precipitation pattern through February 2015

My Initial estimate was 47 million bags for 2015 We are now down to 43-45 million bags as a result of

the dry September and aborted first flowering If October dryness and excessive heat continues to

verify we will be down to 40 million bags or even under 40 million bags

This is assuming a normal flowering phase thereafter If already stressed trees fail to deliver normal

flowering then the crop will be even worse If November is dry/hot then we will have a failed crop

The market must ration demand ahead of this period. This leads to the first half of 2015 as the likely period

where peak prices may be seen It is also where peak premiums of 2015 futures prices to

2016 futures prices may be seen that could break the record set during the black frost period from 1975-1977

With the arbitrage between Arabica(premium) and Robusta reaching historical extremes, Robusta is beginning to look more attractive on a relative basis and could begin to outperform or in the least perform similarly to Arabica

As Arabica prices and Arabica futures spreads ratchet higher demand for lower priced Robusta will grow in response.

This could begin to create a situation where Robusta prices begin to outperform Arabica prices as a desperate switch is initiated by global roasters

In the end, aggregate coffee demand needs to be rationed by 10 to 20 million bags.

Unheard of in modern times and many orders of magnitude worse than the 2010-2011 period

No amount of rain from this point onward can save the crop from being worse than last year and initiating an unprecedented supply squeeze

All Roasters and end users should have 2 years worth of needs protected with cash contracts, long futures contracts and call options.

Failure to do so will put your business in grave jeopardy and setting up a likely bankruptcy filing

This is no joke. This is not business as usual. The coffee industry will never be the same after this is over.

Ratio of March 2015, July 2015 and December 2015 to December 2016 coffee futures prices

December 2015:December 2016 bull futures spread

Options as a result are expensive-Call Options spreads are only viable option-

Straight futures is only for deep pocketed investors and those that can psychologicaly handle $.40 swings

The global economy is entering recession, commodiites have been in freefall and the U.S. dollar has been spiking higher. With near record net long spec positions in coffee, these forces at any moment could cause short term speculator s to liquidate. That would offer last chance to buy if it occurs.

The July 2015 and the December 2015 bull futures spreads against December 2016 is the preferred risk reward way to play this historic supply scarcity coffee situation

Given that the current situation is far more dire than the black frost was due to the fact that large above ground coffee stocks existed back then where they don’t exist today, offers the idea that a new record will be set in this spread when the supply crunch reaches its crescendo

This is the most serious situation to ever envelope the coffee industry. Never have we had two bad Brazilian crops in a row of this magnitude against minimal above ground ending coffee stocks.

If you are a roaster/exporter you must take action now to save yourself from financial ruin.

Coffee farmers should sell hand to mouth until prices better reflect this historic supply demand mismatch

The market has been in a state of denial all year about this. Make sure that you are not the one who is left when the cops come to break up the party.

The long term effects of a tree crop like coffee from this kind of an unprecedented drought are pervasive and irreversible.

The heart of the Brazilian Arabica coffee belt has seen irreversible and permanent damage to the root system.

We will never see the productivity of these trees revert back to their prior glory days

Desperate pruning by coffee farmers to save these trees will prove to be futile

What will become evident in the fall of 2015 is that a large portion of these trees will need to be replaced in order to rehabilitate Brazil back into the dominant coffee producer position in the world.

This will take time and money. A massive tree rejuvenation program will have to be

established and funded by the Brazilian government This will prevent Brazil from seeing production rebound

beyond 50 million bags through 2017 By 2018 brazil should become a powerhouse again and

could begin to see 60 to 70 million bag production potential

Thus, when the peak is seen in the first half of 2015 the coffee market will need to bottom out at a much higher equilibrium level for much longer than has ever been seen in history

I can foresee multiple buying opportunities over the next few years that will offer historic opportunities as the give and take of this unprecedented situation completely get's digested by the industry at large.

One wants to be a buyer of all major breaks from now into 2016.

An historic and multi-generational shorting opportunity will likely present itself from the back half of 2016 to the front half of 2017.

In the meantime, it will not be business as usual for a very long time.

MANY BLEESINGS TO ALL AND MAY GOD SHOWWER YOU WITH HUMILITY AND WISDOM TO CARE FOR ONE ANOTHER IN HARMONEY

PEACE BE STILL