EGSI November CONSULTING 2013

COFFEE WORLD REVIEW WHAT’S INSIDE • 2013/14 Global Situation • EGSI World Coffee Forecast: November 2013 • World Domestic Coffee Consumption • World Coffee Weather • Technical Analysis by RCM Asset Management

1 EGSI COFFEE WORLD REVIEW

A Monthly Publication on Global Supply and Demand of Coffee

Published By Rao Achutuni, PhD, EGSI Consulting Mathew Bradbard & Kevin Davitt, RCM Asset Management

10110 Molecular Drive, Suite 210. Rockville, MD 20850 Website • www.egsiconsulting.com Email • [email protected] twitter@coffeeworldnews Telephone • 301-775-8814

EGSI Consulting also produces the monthly PalmOil World Report. Please Contact Dr. Rao Achutuni for all subscription inquiries

EGSI Consulting, the publisher of the monthly Coffee World Review, does not accept any responsibility for the accuracy, contents, or opinions expressed directly or indirectly in this report. EGSI also denies any liability for any direct, indirect or consequential losses suffered by any individual or group of individuals as a result of relying or utilizing information and or opinions expressed in this report. Actions and conclusions drawn from this report are the sole responsibility of the reader

2 Table of Contents

EGSI COFFEE WORLD REVIEW 2

2013/14 Global Coffee Situation 5

WORLD COFFEE PRICES 6

WORLD COFFEE PRODUCTION AND 2013/14 EGSI FORECAST BY COUNTRY 7

BRAZIL 8

COLOMBIA 10

MEXICO AND CENTRAL AMERICA 13

VIETNAM 14

INDONESIA 15

COTE D’IVOIRE 16

ETHIOPIA 16

UGANDA 17

COFFEE STOCKS 17

WORLD DOMESTIC COFFEE CONSUMPTION 18

WORLD COFFEE WEATHER SUMMARY 19

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3 LIST OF FIGURES

FIGURE 1 WORLD MONTHLY AVERAGE COFFEE PRICES BY TYPE 6

FIGURE 2 WORLD COFFEE PRODUCTION BY TYPE DURING 2011/12 TO 2013/14 8

FIGURE 3 TIME-SERIES OF COLOMBIA ARABICA COFFEE PRODUCTION 11

FIGURE 4 COLOMBIA MONTHLY COFFEE EXPORTS. 12

FIGURE 5 COLOMBIA ARABICA COFFEE AREA (2002-2012) 12

FIGURE 6 COFFEE PRODUCTION IN BRAZIL, VIETNAM, COLOMBIA, AND 13

FIGURE 7 COFFEE PRODUCTION IN MEXICO AND CENTRAL AMERICA 14

FIGURE 8 ICE/NYSE END-OF-MONTH CERTIFIED COFFEE “C” STOCKS 17

FIGURE 9 DOMESTIC C OFFEE CONSUMPTION IN TOP 14 CONSUMERS 18

FIGURE 10 SOUTH AMERICA 90-DAY RAINFALL (A) CUMULATIVE (MM), AND (B) PERCENT OF NORMAL 19

FIGURE 11 CENTRAL AMERICA 90-DAY RAINFALL (A) CUMULATIVE, AND (B) PERCENT OF NORMAL 20

FIGURE 12 EQUATORIAL AFRICA 90-DAY RAINFALL (A) CUMULATIVE, AND (B) PERCENT NORMAL 21

FIGURE 13 S/SE ASIA 90-DAY RAINFALL (A) CUMULATIVE, AND (B) PERCENT NORMAL 22

RCM Asset Management - In Our Eyes - Novemeber 23

LIST OF TABLES

TABLE 1 EGSI WORLD COFFEE PRODUCTION FORECAST BY COUNTRY 7

4 2013/14 Global Coffee Situation World coffee production continues to outstrip demand due to stagnant coffee consumption in both the EU and the United States. This combined with the rising supply of coffee attributed to favorable weather in South America and Southeast Asia is fueling the bearish market sentiment, however, coffee prices are slowly recovering since 06NOV.

In Brazil (APR-MAR Group), the 2013/14 coffee crop is revised lower to 48M 60-Kg bags (↓5.6% YOY) due to erratic growing season weather conditions and some harvest losses.

In Colombia (OCT-SEP Group), favorable weather conditions and cultivation of rust resistant varieties are helping boost coffee exports to about 900,000 60-Kg bags per month. We forecast the 2013/14 crop to easily attain 12M 60-Kg bags (↑20.8% YOY). Colombian Mild Arabicas are fetching premium prices over other Arabicas and Robustas.

Mexico and the Latin America and Caribbean countries continue their recovery process from severe rust infestation. Rock bottom international coffee prices, coupled with little or no government subsidies are hurting small land holders. The rust outbreak caused widespread damage to trees from Guatemala, El Salvador, Honduras, and Nicaragua to Costa Rica.

In Vietnam (OCT-SEP Group), favorable rainfall conditions boosted prospects for the 2013/14 Robusta and Arabica crops. Vietnam could very well produce a million bags of Arabica coffee this season. Vietnam’s 2013/14 total coffee production is projected by EGSI at 28.475M 60-Kg bags (↑14.1% YOY); Robusta production is estimated at 27.5M 60-Kg bags; and Arabica at (↑14.1% YOY). Low robusta prices relative to the Arabicas continue to attract coffee blenders.

In Indonesia (APR-MAR Group) the return of milder weather is helping coffee production in Sumatra. Drier conditions across Java are slowing coffee development. High production costs and low market prices are sapping profitability out of coffee production. Total coffee production is projected at 9/05M 60-Kg bags (↓16.6% YOY).

In Equatorial Africa, favorable weather is benefitting the 2013/14 coffee crop in Cote d’Ivoire, Cameroon, Gabon, Congo, Uganda, and Ethiopia. Dryness persists in Kenya and Tanzania.

EGSI Consulting (EGSI) forecasts 2013/14 world coffee production at 145.795M 60-Kg bags (↑0.1% YOY). World Arabica production is forecast at 84.54M 60-Kg bags (↓0.8% YOY). The 2013/14 world Robusta production is forecasted at 61.255M 60-Kg bags, (↑1.5% YOY). Arabica supplies are down marginally but made up by some gains in Arabica coffee.

ICE Arabica coffee prices have lost 23.33 percent year-to-date (YTD) but trading at USd110.25 (29NOV) up from a low of USd101.50 (06NOV). Robusta prices are trading around USd 87.83(US Markets) and USd81.42 9(EU Markets). The daily ICO Composite Price Indicator @ USd102.58/lb (↑0.3%), Colombian Milds @ 123.19/lb (↑0.1%), Other Milds @ 122.80 (↔), Brazilian Naturals (↑0.1%), and Robustas (↑0.8%) (28NOV)

5 WORLD COFFEE PRICES World monthly average coffee prices (FIG. 1) have been witnessing a strong and sustained bear market through October following the high established around April 2011. Colombian Mild Arabica’s are continuing to trade highest, followed by Other Mild Arabica’s, Brazilian Natural Arabica’s, and Robusta’s. A comparison of ICO monthly US price statistics shows that Colombian Milds declined by 3.44% MOM; Brazilian Natural Arabicas declined by 2.73 percent; Robustas declined by 4.65 percent MOM; and Other Mild Arabicas declined by 2.71 percent MOM. Robusta coffee continues to have a significant price advantage over Arabicas. Blenders and roasters will continue to take advantage of this price differential.

The 2013/14 green coffee bean supply situation continues to be very bearish. Prospective investors continue to hold-out for coffee prices to fall further. Shifting consumer demand is moving towards single cup brewers, now common in most offices and several homes in the West. Coffee retailers in the U.S. are now cutting prices ahead of the holiday season to stimulate demand.

Daily coffee prices are showing signs of recovery from 06NOV. ICE Arabica coffee prices have lost 23.33 percent year-to-date (YTD) but trading at USd110.25 (29NOV) up from a low of USd101.50 (06NOV). Robusta prices are trading around USd 87.83(US Markets) and USd81.42 9(EU Markets). The daily ICO Composite Price Indicator @ USd102.58/lb (↑0.3%), Colombian Milds @ 123.19/lb (↑0,1%), Other Milds @ 122.80 (↔), Brazilian Naturals (↑0.1%), and Robustas (↑0.8%) (28NOV).

Figure 1 World Monthly Average Coffee Prices by Type

6 WORLD COFFEE PRODUCTION AND 2013/14 EGSI FORECAST BY COUNTRY

An overview of weather, market factors, policy issues, EGSI Coffee Production Forecasts (TABLE 1), as well as production estimates from other government agencies are presented in this section. Some revisions were also made to the 2012/13 estimates based on in-country reports.

Table 1 EGSI World Coffee Production Forecast for 2013/14

EGSI WORLD COFFEE FORECAST (OCT 2013 UPDATE) 2012/13 2013/14 (1000 60-Kg Bags) % CHANGE (YOY) 2012/13 (1000 60-Kg Bags) % CHANGE (YOY) COUNTRY ARABICA ROBUSTA TOTAL ARABICA ROBUSTA TOTAL ARABICA ROBUSTA TOTAL ARABICA ROBUSTA TOTAL Brazil 37000 11000 48000 -3.5% -11.9% -5.6% 38344 12482 50826 10.5% -13.9% 3.3% Vietnam 975 27500 28475 14.7% 14.1% 14.1% 850 24100 24950 6.3% -4.4% -4.0% Indonesia 1550 7500 9050 -11.4% -17.6% -16.6% 1750 9100 10850 34.6% 30.0% 30.7% Colombia 12000 0 12000 20.8% 0.0% 20.8% 9930 0 9930 29.7% 0.0% 29.7% Ethiopia 6500 0 6500 2.8% 0.0% 2.8% 6325 0 6325 0.1% 0.0% 0.1% 1800 4000 5800 9.6% 9.3% 9.4% 1643 3660 5303 -2.8% 3.4% 1.4% Honduras 4000 0 4000 -9.1% 0.0% -9.1% 4400 0 4400 -23.5% 0.0% -23.5% Peru 4000 0 4000 -7.0% 0.0% -7.0% 4300 0 4300 -16.5% 0.0% -16.5% Guatemala 3700 10 3710 -11.9% 0.0% -11.9% 4200 10 4210 -4.5% 0.0% -4.5% Mexico 3200 150 3350 -14.7% -14.3% -14.6% 3750 175 3925 -8.5% -12.5% -8.7% Uganda 675 2850 3525 3.8% 5.6% 5.2% 650 2700 3350 -25.5% 21.1% 8.0% Cote d'Ivoire 0 2075 2075 0.0% 3.8% 3.8% 0 2000 2000 0.0% 25.0% 25.0% Malaysia 0 1450 1450 0.0% 3.6% 3.6% 0 1400 1400 0.0% -3.4% -3.4% Nicaragua 1375 0 1375 -12.7% 0.0% -12.7% 1575 0 1575 -16.2% 0.0% -16.2% Costa Rica 1475 0 1475 -7.8% 0.0% -7.8% 1600 0 1600 -9.9% 0.0% -9.9% Tanzania 535 450 985 7.0% -13.0% -3.1% 500 517 1017 37.0% 158.5% 80.0% PNG 900 80 980 12.5% 6.7% 12.0% 800 75 875 -40.7% 50.0% -37.5% Kenya 775 0 775 1.0% 0.0% 1.0% 767 0 767 -6.1% 0.0% -6.1% 0 900 900 0.0% 4.7% 4.7% 0 860 860 0.0% 1.2% 1.2% El Salvador 800 0 800 -8.6% 0.0% -8.6% 875 0 875 -25.5% 0.0% -25.5% Venezuela 780 0 780 6.8% 0.0% 6.8% 730 0 730 4.3% 0.0% 4.3% Others 2500 3290 5790 10.8% 0.0% 4.4% 2256 3290 5546 -29.9% -10.0% -19.3% WORLD 84540 61255 145795 -0.8% 1.5% 0.1% 85245 60369 145614 1.5% -0.2% 0.8%

World coffee production in 2013/14 continues to surge due to generally favorable growing conditions in Colombia, Vietnam, and India. Brazil experienced a 5.6 percent production shortfall in 2013. Any projected production shortfalls are likely to be offset by production increases in Colombia (Arabica), Vietnam (robusta and Arabica), India (Robusta), Ethiopia (Arabica) and Uganda (Robusta and Arabica). The total supply situation (production plus Carryover Stocks) is marginally bearish.

7 The EGSI World Green Coffee production forecasts for 2013/14:

 EGSI Forecast: World Total Green Coffee Production at 145.105 M 60-Kg bags (↓0.3% YOY)  EGSI Forecast: 2013/14 World Arabica Production at 84.54M 60-Kg bags (↓0.8% YOY)  EGSI Forecast: 2013/14 World Robusta Production at 60.565M 60-Kg bags (↑0.3% YOY)

A comparison of world coffee production by type (Total, Arabica and Robusta) during 2011/12, 2012/13 and 2013/14 seasons (Fig. 2) shows a general stagnation due to low international prices. Total world coffee production is forecasted at 145.105M bags(↓0.3% YOY). Arabica production is forecasted at 85.54M 60-Kg bags (↓0.8% YOY). Robusta production is forecasted at 60.565M 60-Kg bags (↑0.3% YOY).

Figure 2 World Coffee Production by Type during 2011/12 to 2013/14

BRAZIL The 2013 (MY2013/14) coffee growing season (APR-OCT group) in Brazil has ended in October. The season began with favorable rainfall in SEP-OCT (2012) and yielded two robust flowerings. However, the crop experienced considerable weather variability ranging from erratic rainfall, high temperatures, to near freezing temperatures in July and August in Parana and the

8 south. Overall, weather conditions in Minas Gerais were favorable and beneficial for coffee production. Heavy rainfall during June and July contributed to a high percentage of fallen coffee beans, adding to harvest costs and reduction in bean quality. The total coffee production in Minas Gerais is pegged at 26.158M 60-Kg bags (↓2.9% YOY), out of which Arabica is at 25.872M 60-Kg bags (↓2.9% YOY); and Robusta at 0.286M 60-Kg bags (↓4.7% YOY).

Sao Paulo experienced significant production losses due to the prolonged drought in 2012 which induced only two flowerings instead of three to four in the southeastern regions of Ourinhos and Avare, followed by heavy rainfall during the peak harvest period. The total production estimate is at 3,854,354 60-Kg bags of processed all Arabica coffee (CONAB).

CONAB is reporting that the coffee crop in Bahia endured the effects of a prolonged drought in the Highland region. Consequently, Bahia suffered yield losses of about 4.92 percent due to the prolonged drought of 2012 which lasted through grain filling. Total coffee production is estimated at 1.818M 60-Kg bags, out of which 1.092M bags are Arabica and 0.726Mbags are Robusta.

In Parana, a hard freeze in late July and heavy rainfall during harvest. Rainfall conditions were generally favorable until May, but then turned excessive lowering bean quality. Overall, Parana’s 2013/14 coffee crop is estimated by CONAB at 1.64 million 60-Kg bags (↑3.8% YOY).

In Espirito Santos, total coffee production is estimated by CONAB at 11.697M 60-Kg bags. The Arabica is at 3.486M 60-Kg bags and the Robusta crop is estimated at 8.211M 60-Kg bags of processed coffee.

Overall CONAB pegged the 2013/14 Brazilian coffee production at 47.544M 60-Kg bags, down 6.46 percent in losses due to weather. The Arabica crop is at 36.667M 60-Kg bags (↓4.4% YOY) while the Robusta crop is at 10.877M 60-Kg bags (↓12.9% YOY).

 Brazil CONAB 2013 (3rd Estimate) Production and Yield:

o Total Coffee: 47.544M 60-Kg bags, (↓6.46% YOY). Yield at 23.66 bags/Ha o Arabica: 36.667M 60-Kg bags, a reduction of 1.68M bags (↓4.37% YOY) due to a combination of the low biennial cycle, high temperatures and erratic rainfall o Robusta: 10.877M 60-Kg bags, a reduction of 1.61M bags (↓12.86% YOY) o Espirito Santo (#1 Robusta): Total 11.697M bags (↓6.44% ); Robusta (#1): 8.21M bags; Arabica: 3.486M bags; Yield (Total): 25.81 bags/Ha o Minas Gerais (#1 Arabica): Total 26.158M bags; Arabica 25.872M bags; Robusta 0.286M bags Yield (Total): 25.22 bags/Ha (↓2.92% YOY) o Sao Paulo: Arabica: 3.845M bags, ↓ 28.21% YOY; Yield: 24.2 bags/Ha o Bahia: Total 1.817M bags (↓15.4% YOY); Arabica 1.092M bags (↓18.3% YOY); Robusta 0.726 (↓10.7% YOY). Yield (Total): 13.51 bags/Ha o Parana: Arabica 1.64M bags (↑3.8% YOY), Yield: 24.99 bags/Ha

9  CONAB 2013 Total Coffee Area: 2,312,152Ha, down 0.74% YOY o Production Area: 2,009,865 Ha (86.93%); Immature Area: 302,287 (13.07%) Ha . Minas Gerais Total Coffee Production Area: 1,035,497 Ha (↑0.68% YOY) . Espirito Santo total Coffee Production Area: 499,082 Ha; Robusta Area 311,197 Ha; and Arabia Area 187,885 Ha.

 EGSI MY2013/14 (APR-MAR group) Brazil Forecast: o Total green coffee production: 48M 60-kg bags (↓5.6% YOY) o Arabica Coffee: 37M 60-Kg bags (↓3.5% YOY) ) o Robusta Coffee: 11M 60-Kg bags (↓11.9% YOY)

Brazilian coffee exports are up due to a weak Real

 CeCafe: 2013 green coffee exports projected at 30.5M 60-Kg bags (↑7% YOY)  CeCafe: 2013 July-September exports at 7.4M 60-Kg bags (↑6% YOY)

COLOMBIA Colombia belongs to the OCT-SEP coffee group but has two distinct harvest windows. The first or main harvest (about 65 percent of crop) period ranges from October to December, while the second or maraca harvest ranges from April to June.

Colombian coffee production (Fig. 3) enjoyed sustained production levels between 10-13.5 million 60-Kg bags during the period 1977/78 to 2007/08, till it was infested by coffee rust in 2008/09. The period 2008/09 to 2010/11 witnessed the spread of coffee rust amidst heavy rains associated with the La Nina. The massive replanting of rust resistant varieties in 2010 is now bearing fruit and helping Colombia regain its earlier stature as the world’s third largest producer of coffee, and second largest producer of Arabica coffee. In 2013/14 Colombia (OCT-SEP Group) will likely produce about 12 million 60-Kg bags of coffee (↑20.8% YOY).

Colombia’s monthly exports of coffee (Fig. 4) peaked around 1,750,000 60-Kg bags during the early 1990’s. Its green coffee exports fell during the period 2009 -2011 due to coffee rust. Colombian Arabica coffee exports during October 2013 are at 0.877 million 60-Kg bags (↑50.67% YOY). The YTD cumulative Arabica coffee exports are at 7.62 million 60-KgBags (↑34.96% YOY).

10 Figure 3 Time-Series of Colombia Arabica Coffee Production

Colombia’s Arabica coffee area (Fig. 5) increased by 6 percent over the period 2008-2012 with the replanting of rust resistant varieties. According to the Colombian Coffee Growers Association the Arabica coffee area in 2012 was at 0.93M Ha (↑1.1% YOY). We expect the 2013 acreage to increase by another 1 percent to 0.94M Ha. Low returns on investment, coupled with reliance on government subsidies will likely curb increases in area in the near future.

 EGSI Consulting forecasts the 2013/14 (OCT-SEP) Colombian Arabica coffee production at 12M 60-Kg bags (↑20.8% YOY)

Coffee production in the world’s top 4 producers Brazil, Vietnam, Colombia and Indonesia is shown in Figure 6 for the period 2008/09 to 2013/14. The biennial production cycle in Brazil is more distinguishable during 2008/09 to 2010/11, but barely so in recent years due production increases as a result of better cultural practices and mechanization. Vietnam has been steadily increasing its coffee production during this period. In 201314, it is expected to produce 1M bags of Arabica coffee in addition to about 27.5M bags of robusta. In 2013/14 Colombia is expected to regain its spot as the world’s second largest producer of Arabica coffee.

11 Figure 4 Colombia Monthly Coffee Exports.

Figure 5 Colombia Arabica Coffee Area (2002-2012)

12 Figure 6 Coffee Production in Brazil, Vietnam, Colombia, and Indonesia

MEXICO AND CENTRAL AMERICA Mexico and Central America are now trying to recover from the 2013 coffee rust (Roya) outbreak. Low international coffee prices are slowing the recovery process. Especially hard hit are the small producers that lack adequate resources to cope with the situation. In addition to rust damage, Mexico also experienced a series of tropical storms that caused wind and flood damage. Forecasts for 2013/14 and revised estimates for the 2012/13 crops (October- September) are both shown in Table 1.

EGSI’s forecasts for 2013/14 Mexico and Central American Arabica coffee production:

 Mexico: 3.45M 60-Kg bags of Total green coffee (↓12.1% YOY); 3.3M 60-Kg bags of Arabica (↓12% YOY), and 135,000 60-Kg bags of Robusta (↓10% YOY)  Guatemala: 3.71M 60-Kg bags of Arabia plus small amount of Robusta (↓11.9% YOY)  Honduras: 4.0M 60-Kg bags (↓9.1% YOY)  Nicaragua: 1.375M 60-Kg bags (↓12.7% YOY) due to severe rust damage. Over a third of the crop is acknowledged to be infected by rust  El Salvador: 0.80M 60-Kg bags (↓8.6% YOY) due to severe rust damage

13  Costa Rica: 1.45M 60-Kg bags (↓13.4% YOY) due to severe rust damage

Mexico and Central America coffee production for the period 2008/09 to 2013/14 are shown in Figure 7. The regional peak in production occurred during 2011/12, the significant drop in regional production during 2013/14 is due to the severe rust problem.

Figure 7 Coffee Production in Mexico and Central America

VIETNAM Vietnam belongs to the OCT-SEP Group. Improved 30AUG2013– 27NOV2013 rainfall conditions are benefitting the 2013/14 Robusta and Arabica coffee crops. Vietnam also received heavy rainfall due to hurricane Haiyan. Harvesting of the 2013-14 coffee crop is well under way. EGSI forecasts its 2013/14 Vietnam coffee crop as follows:

EGSI 2013/14 Coffee Production Forecast for Vietnam:

 Total Green Coffee: 28.475M 60-Kg bags (↑14.1% YOY) o Robusta Coffee: 27.5M 60-Kg bags (↑14.1% YOY) o Arabica Coffee: 0.975M 60-Kg bags (↑14.7% YOY) Other Estimates for 2013-14 include:

 NEDCOFFEE BV: 29M 60-Kg bags (1.74MMT) vs. 1.5MMT in 2012-13 (↑16%YOY) 14  Bloomberg Survey (median of 9 estimates): 1.7MMT or 28.3M 60-Kg bags  Volcafe: 30M 60-Kg bags

VIETNAMESE COFFEE EXPORTS  General Dept. of Customs: NOV1-15, 2013 Exports at 36,710 Tons @ USD 66,390,294  General Dept. of Customs: 2013 YTD Exports at 1,124,046 Tons @ USD2.39 Billion  General Dept. of Customs: OCT2013 exports at 61,155 Tons (↓3.8%MOM, ↓24.5% YTD)

INDONESIA The 2013/14 coffee production in Indonesia (APR-MAR group) has been characterized by very heavy seasonal rainfall, pests and diseases, and accompanying bean quality issues. The heavy rains contributed initially to an increased incidence of fallen flowers and later to dropping berries. Improved 90-Day rainfall (30AUG2013 - 27NOV2013) conditions are helping coffee production in Sumatra, but some dryness issues are evident in Java. High production costs, low coffee prices, coupled with a falling Rupiah continue to affect producers across the country. For these reasons, we forecast the 2013/14 total coffee crop to be at about 16.6 percent below the 2012/13 crop.

 EGSI Consulting forecasts 2013/14 Indonesian coffee production as follows: o Total Green Coffee: 9.05M 60-Kg bags (↓16.6% YOY) o Arabica Coffee: 1.55M 60-Kg bags (↓17.6% YOY) o Robusta Coffee: 7.5M 60-Kg bags (↓6.3% YOY)  The revised 2012/13 production estimates are as follows: o Total Green Coffee: 10.85M60-Kg bags (↑30.7% YOY) o Arabica Coffee: 1.75M 60-Kg bags (↑34.6% YOY) o Robusta Coffee: 9.1M 60-Kg bags (↑30.0% YOY)

INDIA

India is the world’s 6th largest producer of coffee, producing twice as much Robusta than Arabica. The new coffee harvesting season commenced in October in a timely manner. Seasonal rainfall in coffee areas has been normal to above normal. Coastal Andhra Pradesh was hit by a series of tropical cyclones (hurricanes) with accompanying wind and heavy rainfall. EGSI forecasts India’s 2013/14 coffee production as follows:

 EGSI Consulting India Forecasts for 2013/14 (Oct-Sep): o Total coffee production at 5.8M 60-Kg bags (↑9.4 percent YOY) o Arabica coffee production at 1.8M 60-Kg bags (↑9.6 percent YOY) o Robusta coffee production at 4M 60-Kg bags (↑9.3 percent YOY)

 India Coffee Board (ICB) post-blossom coffee production forecasts for 2013/14: o Total Coffee production at 347,000MT or 5.783M 60-Kg bags (↑9.1% YOY) 15 o Post-blossom Robusta Forecast: 236,000MT or 3.933M 60-Kg bags (↑7.5% YOY) o Post-blossom Arabica Forecast:111,000MT or 1.850M 60-Kg bags (↑12.6% YOY) mainly due to the biennial production cycle and optimal rainfall conditions

The Coffee Board of India issued forward export permits for Indian/re-exported coffee as follows:

 JAN-NOV 2013: 293,872 Tonnes or 4.898M 60-kg bags (↑1.13% YOY)

The 2012-13 coffee acreage by type is as follows:

 Arabica: 205,775 Ha (↑2.34% YOY); Robusta: 209,566 Ha (↑0.45% YOY); Total 415,341 Ha (↑1.34% YOY)

COTE D’IVOIRE Favorable rainfall conditions are benefitting the 2013/14 Cote d’Ivoire Robusta coffee crop (OCT-SEP Group). EGSI revises the 2013/14 robust crop as follows:

 EGSI forecasts 2013/14 (OCT-SEP) robusta green coffee production at 2.075M 60-Kg bags (124,500MT), (↑3.8% YOY)

ETHIOPIA Near normal rainfall conditions continue to benefit the 2013/14 coffee crop.

 EGSI forecasts 2013/14 (OCT-SEP) Ethiopian Arabica production at 6.5M 60-Kg bags (390,000MT) (↑ 2.8% YOY)

KENYA

Seasonal rainfall (30AUG2013-27NOV2013) has been sub-optimal in the main Arabica coffee areas of Kenya. Kenya belongs to the (OCT-SEP Group). Coffee production is lowered from last month to reflect current crop conditions.

 EGSI forecasts 2013/14 Arabica coffee crop at 0.785M 60-Kg bags (↑2.3% YOY)

A shortage of farm credit is putting pressure on the government to release funds from the National Debt Waiver Program (DELMAS, NOV2013). The funds are needed to provide resources to farmers that have abandoned the coffee crop due to low prices.

16 UGANDA Uganda produces both Robusta and Arabica coffee (4:1 by volume) and belongs to the SEP-OCT Group. The 2013/14 coffee season has commenced very favorably with ample rains for stand establishment. EGSI forecasts the 2013/14 crops as follows:

 EGSI forecasts 2013/14 Total coffee crop at 3.525M 60-Kg bags or 211,500MT (↑5.2% YOY)  EGSI forecasts 2013/14 Arabica coffee crop at 0.765M 60-Kg bags (↑3.8% YOY)  EGSI forecasts 2013/14 Robusta coffee crop at 2.85M 60-Kg bags (↑5.6% YOY)

DELMAS (NOV 2013) is reporting that the government of Uganda is promoting the National Coffee Policy aimed at improving sustainable coffee production and implementing sound cultural practices. Funds will also be set aside for coffee research and extension services. Coffee production is now being expanded into northern Ugandan regions of Lango and Acholi .

 Uganda exported 224,301 60-kg bags in September (↑27.2% YOY)

COFFEE STOCKS ICE/NYSE Certified Coffee “C” stocks are slightly below the long-term mean (Fig. 8). Stock levels fell well more than one standard deviation (STD) below the mean during the period 2010 July-2012 July. November 2013 certified stock levels are up, but still below the long-term mean.

 Green Coffee Association: Total Exchange/Non-Exchange Stocks as of 31OCT2013: 2,712,325 bags (↓2.0% MOM)

Figure 8 ICE/NYSE End-of-Month Certified Coffee “C” Stocks

17 WORLD DOMESTIC COFFEE CONSUMPTION

World coffee consumption patterns and preferences are shifting in response to new single cup brewing systems such as the Keurig system. These systems utilized a small quantity of coffee ground and deliver a quality cup of coffee without any guesswork. On the other hand, conventional brewing systems require larger quantities of coffee ground and are more cumbersome to clean. Consumer coffee preferences in western countries is rapidly shifting towards single cup systems due to their sheer convenience. Western coffee consumption patterns are exhibiting signs of levelling off largely due to shifting consumption patterns.

The world domestic consumption of coffee for the period 2008/09 to 2013/14 (projected) shows considerable inter-annual variability (see right-hand side scale in Fig.9), as well as a biennial consumption pattern. The EU-27 is the world’s largest block of coffee consuming nations accounting for over a third’s of world’s supply. Coffee consumption during 2012/13 and 2013/14 (estimated) stagnated due to EU’s slow economic growth.

Coffee consumption in Brazil has been steadily increasing by about 17.3 percent since 2008/09. Coffee consumption in is on the rise (↑313% compared to base year 2008/09); Vietnam (↑100%), Russia (↑37.9%), Indonesia (↑30.7%), Switzerland (↑27.8%), and Japan (↑9%). Coffee consumption is relatively flat in the United States, Canada, Ethiopia, Algeria, Mexico, and India (not shown).

Figure 9 Domestic Coffee Consumption in Top 14 Consumers 18 WORLD COFFEE WEATHER SUMMARY South American 90-day cumulative seasonal rainfall (Fig. 10) is generally favorable in the key coffee areas of Colombia, Ecuador, and Peru. Southeastern Paraguay continues to experience unfavorable conditions. Rainfall conditions in Uruguay are extremely favorable. Rainfall conditions in Argentina are normal to slightly above normal, finally ending the drought there.

Figure 10 South America 90-Day Rainfall (a) Cumulative (mm), and (b) Percent of Normal

Scattered areas of dryness are present across most of Brazil with the exception of the northeastern coastal areas. Coffee areas in Bahia and northern Minas Gerais are experiencing dryness requiring supplemental irrigation.

19 Figure 11 Central America 90-Day Rainfall (a) Cumulative, and (b) Percent of Normal

Mexico and Central America received near- to above normal rainfall during the 90-day period (30AUG2013-27NOV2013) benefitting the Arabica coffee crop (Fig. 11). The Yucatan peninsula received 150-200 percent of normal rainfall.

20 Coffee producing countries across Equatorial Africa received significant rainfall to boost prospects for the coffee crop (Fig. 12). Conditions are generally very favorable especially in Sierra Leone, Liberia, Cote d’Ivoire, Ghana, Cameroon, and Equatorial Guinea, parts of Gabon, Congo, Uganda, and Ethiopia. Rainfall conditions are sub-optimal in Kenya and Tanzania.

Figure 12 Equatorial Africa 90-Day Rainfall (a) Cumulative, and (b) Percent Normal

The coffee areas in South and Southeast Asia received very favorable seasonal rainfall (30AUG2013-27NOV2013) benefitting coffee production. (Fig.13). India’s coastal areas along Andhra Pradesh and Orissa experienced heavy rainfall and winds associated with another tropical cyclone after Phailin. Laos, Cambodia, Vietnam and Thailand received near normal rainfall, benefitting crops. Rainfall across Malaysia and Indonesia was generally normal, with the exception of Java, where rainfall was deficient. Coffee areas in southern Sumatra Lampung), Java, Bali and Papua New Guinea received near normal to above normal rainfall.

21 Figure 13 S/SE Asia 90-Day Rainfall (a) Cumulative, and (b) Percent Normal

22 An Assessment from RCM Asset Management By Matthew Bradbard & Kevin Davitt

In our last report, we pointed to an Arabica market that was under significant pressure and continued to make lower lows. The coffee market, perhaps more so than any other commodity over the past few years, has reflected the supply versus demand dynamic that dominates Econ 101. Prices act to ration demand and vice versa.

It appears we have found a value zone. In November, near-term Coffee futures traded to $1.01/lb (11/5 and 11/6) and proceeded to rally 10% off lows. In December of 2008, front month Coffee traded down to $1.01 as well. Past performance is not indicative of future results. From our standpoint, the market appears to have found support.

5-Year Coffee:

Source: FinViz

Previously we pointed out that “in many regions (of Brazil) prices were at or below cost of production”. At this point, we would treat Coffee as a trading vehicle with a longer term upside bias. 30-60 day option volatility remains in the low 20% area, which implies about 1.5 cent daily ranges. Multi-year support

23 comes in around $1.01-1.02/lb. Short-term resistance lies between $1.10 and 1.12. We see more meaningful resistance between $1.15 and 1.19/lb.

The macro environment in Brazil may warrant some attention for Coffee traders as the Real is testing long- term lows and the 10-year yield is approaching 13.5%.

10-Year Brazilian Real:

Source: http://www.xe.com/currencycharts/?from=BRL&to=USD&view=10Y

Agriculture plays a giant role in the Brazilian economy, which is the 6th largest in the world. They are absolutely a commodity-based economy and the Bovespa (Brazil’s benchmark index) is reflecting lower input prices.

24 Brazil Exports:

Source: http://en.wikipedia.org/wiki/File:Brazil_Export_Treemap.jpg

25 Daily Coffee:

Source: www.computervoice.com

It is clear as night is day that the trend lower is continuing, however, over the past four weeks, a base has appeared to be forming around the $1.05 level in March futures. We would like to see a settlement above the down-sloping trend line to confirm a meaningful, and NOT just tradable, bottom. A close above the 20-day MA (red line in the chart above) would likely get futures trending towards the 50-day MA (light blue line). Futures have not been above that pivot point in all of 2013 but we do expect that to play out in 2014. From current trade that would represent an appreciation of 12%. Our objective that we feel could be achieved in Q1 is the 38.2% Fibonacci level just under $1.30.

26 Weekly Coffee:

Source: www.computervoice.com

After three positive weeks that lifted coffee off the mat, futures resumed lower trade - shedding 4.45% last week. As long as a new low is not made, we like scaling into bullish trade near current levels. Use the two red horizontal lines in the chart above as what we view to be the low and high in the coming year. That being said, we will be looking to establish bullish trade ideas - waiting for confirmation… March taking out $1.15 and we see two consecutive weeks with a settlement above that pivot point.

Suggested Trading Strategies:

• Buy KCN14 futures- Buying July coffee futures on approximately December 22 and exiting on approximately January 13 has been profitable thirteen out of the last fifteen years*. Past performance is not indicative of future results. The average profit has been roughly $1950 which represents 5.25 cents. Even in profitable years one may need to take considerable heat, to revise the strategy slightly let’s risk $1500 per contract or to a new low (the lesser of the two when opened.)

* Futures prices may have already factored in the seasonal aspects of supply and demand.

27 Source:www.mrci.com • For an option idea, we like selling a put under the market and using that premium towards buying verticals in either May or July call options. For example selling a May $1 put, collect $750. Buy the May $110 call for $1975 and sell (2) $125 calls collecting $1125. Total cost should be ballpark $100 plus transaction costs. Writing options bears unlimited risk and consider margin obligations as an options seller.

To discuss this or any other research, please contact RCM Asset Management through:

Matthew Bradbard, Vice President of Managed Futures and Alternatives [email protected] or 312-870-1653

Kevin Davitt, Global Execution and Futures/Options Broker [email protected] or 312-870-1520 ∙∙∙∙∙

Risk Disclaimer: This information is not to be construed as an offer to sell or a solicitation or an offer to buy the financial products herein named. The factual information of this report has been obtained from sources believed to be reliable, but is not necessarily exhaustive and is not guaranteed to be accurate. You should fully understand the risks associated with trading futures, options and retail off-exchange foreign currency transactions (“Forex”) before making any trades. Trading futures, options, and Forex involves substantial risk of loss and is not suitable for all investors. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more than your initial investment. Opinions, market data, and recommendations are subject to change without notice. Past performance is not necessarily indicative of future results. This report contains research as defined in applicable CFTC regulations. Both RCM Asset Management and the research analyst/s may have positions in the financial products discussed. 28