Blue Nile Research – Sesame 17-01-18

Sesame Market Update: 17/01/18

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1. ECX sesame trading volumes are strong and this has pushed prices to 3-year highs

This season’s sesame market started on the back of a government-planned 15% currency devaluation relative to the US Dollar. This was in the response to, predominantly, lagging sesame seed exports in 2017 relative to historical levels (Exhibit 2) and the troublesome current account deficient. The International Monetary Fund (IMF) has previously indicated that the Ethiopian Birr is overvalued by 30% so there may be more pressure for another devaluation in the future depending on export performance.

It came to no surprise that this FX devaluation fuelled strong buying demand as new crop hit the market in November, taking little under two months for the price to rally back to pre-devaluation levels (Exhibit 3) with Humera grade 1 now trading over 1,500 USD per MT FOB Djibouti.

Exhibit 1: Sesame FOB break-even export prices

As of 12 January 2018, one-month date range

* did not trade in previous session
Source: Blue Nile Trading Ltd., Ethiopian Commodity Exchange

Exhibit 2: Ethiopian sesame exports in the last 4 years

Source: Blue Nile Trading Ltd., Ethiopian Revenue and Customs Authority

Exhibit 3: Six-month Humera sesame FOB price trend

Source: Blue Nile Trading Ltd., Ethiopian Commodity Exchange

2. The FX devaluation has led to a surge in sesame trading this year, but volumes are slowing

With this macro backdrop, this year’s trading has started strongly. ECX sesame trading volumes are already 60% higher compared to the same period last year (Exhibit 4) with 150,000 MT of sesame (Humera and Wollega) trading compared to 90,000 MT in 2016/17. Humera sesame is the most dominant variety, with grades 2 and 3 forming nearly 80% of all sesame traded at the ECX so far this season.

It is interesting to note how the price and volumes have behaved this season. Initially, strong demand has pushed prices up (demand pull) whereas at the beginning of the year, prices have spiked over 15% on lower volumes. In this case, micro factors such as suppliers raising their prices has been the dominant force for the price action.

Exhibit 4: Humera grade 2 price trend and MY16/17, MY17/18 volume comparison

Source: Blue Nile Trading Ltd., Ethiopian Commodity Exchange

3. Sesame daily volatility is increasing on lower trading volumes which is a concern for trade execution

Volatility spiked prior to the start of the sesame season, as discussed in section 1, to over 15% per day (over a 3 sigma move!). In the subsequent months, volatility fells to c. 1-2% range and formed a perfect trading and execution market. The vast majority of end-users have fulfilled their buying obligations this season but those still on the side-lines face a more hazardous market with volatility increasing to over 5% on low volumes – difficult for trade execution.

January to April are typically active trading months before the market slows towards the end of the season. If prices remain elevated near these levels, we may see trading volumes stall and suppliers re-adjust prices lower to shift cargo and earn export USD before buyers source from alternative origins.

Exhibit 5: Sesame daily volatility over the last 3 months

Source: Blue Nile Trading Ltd., Ethiopian Commodity Exchange

Thank you for reading and if you have any views, comments or trading inquiries then please get in touch using my details below.