Coffee traders in storage game as Colombian glut grows

Stocks of Colombian coffee in exchange warehouses have more than doubled in the last seven weeks, hitting a record high as traders store a glut of beans as demand for washed arabica coffee wanes and futures remain under pressure.
ICE Futures US warehouses are currently storing 312,860 bags of certified Colombian beans. The buildup is likely part of a so-called cash-and-carry deal, whereby a trader buys beans, stores them and sells them forward at a profit for future delivery.
This is an established trade play across commodities when the market structure known as a contango, with forward prices at a premium to cash, is in place and financing and storage costs are low. Arabica's front-month-to-second-month spread was trading around 3 cents a lb on Thursday.
Traders are also using the stored Colombian beans as collateral to obtain favorable financing, as ICE certification means there is a guaranteed buyer, several sources said.
Colombian beans are coveted for smooth flavor and fetch a hefty premium in the cash physical market, currently at 16 cents a lb ex dock over the May contract.
Tendering Colombian coffee against the exchange garners a premium of just 2 cents a lb, and sellers must pay a $1.25 grading fee for each certified bag.
One US trader said sellers would have to be "in a coma" to forego the decent physical differentials, but they have little choice as roasters don't need the coffee after stocking up when prices fell last month.
Uncertainty about supplies from top grower Brazil's crop after prolonged dry weather also remains high, causing volatility in futures prices. The storage could be a bet that future gains will outstrip the current physical differential if global supplies tighten later in the season, traders said.
"This is a great place for you to coffee if you expect a squeeze ahead of you," said Christian Wolthers, president of green coffee importers Wolthers Douque USA in Fort Lauderdale, Florida.
The surge in stocks comes as Colombia posts strong exports amid its second straight bumper crop.
During the same period, no other country saw a significant rise, and total certified stocks rose just 51,864 bags to 2.3 million bags as of Wednesday, according to ICE data.
Seasonality may also be a factor, as demand often tails off during the spring and summer, traders said.