Coffee Weekly Report

The latest weather bulletin from StoneX, produced from data from US agencies NOAA and NASA, shows producing municipalities in the Southern Minas Gerais received around 80 mm in the last 15 days. The Matas de Minas, Mogiana, ROSP, Paraná, and Southern Espírito Santo regions received between 40 and 90 mm of rainfall. The Cerrado region of Minas Gerais continues with the lowest accumulation, around 30 mm. For the next 14 days, the model points to between 100 mm and 200 mm in most producing regions. Recent precipitation has been sufficient to start a new round of flowering, which has been reported in some Southern Minas Gerais and Matas de Minas municipalities. Moreover, the forecasted rainfall should continue to stimulate flowering in producing regions and favor the production development in Brazil. 

The American NOAA and Australian BOM agencies continue to point to the La Niña occurrence weak to moderate at the end of this year and early next year. However, as mentioned in other editions of the Coffee Weekly Report, the La Niña occurrence between December and January could be associated with excessive rainfall in Colombia, Central America, and Asia – most countries in this region will be in their harvest period. The next update to the NOAA forecast will be released on Thursday (14).

Source: StoneX, with data from NOAA/NCEP/EMC.

This week, the data for Brazilian coffee exports in September will be released by Cecafé, which should point to a reduction in Brazilian exports amid the logistical crisis that has been set amid the Covid-19 pandemic. Cecafé's data had already shown a 28% reduction in exports in August. For September, the preliminary data from Secex had already pointed to a reduction of more than 20% in coffee exports, a scenario that the council's data can confirm. Like other countries, Brazil has been facing serious logistical problems, which have limited the supply of containers and caused an increase in ocean freight costs.

While on the one hand, the return of the rainfall has a bearish tone for New York, the sharp drop in certified coffee stocks brings a positive sentiment and is the main reason for the recovery of prices at the end of last week. Since mid-September, Arabica coffee's certified stocks have fallen by over 200,000 bags, returning to a level of around 1.94 million bags. As we have commented in previous articles, certified stocks are closely related to price differentials at origin and related to transport costs for certification. Therefore, certified stocks are expected to decline since the reduction in coffee supply tends to keep differentials strengthened, which discourages coffee certification. In addition, this process depends on freight costs, but as they are sky-high, it makes the certification process unattractive. 

In addition to certified stocks, the recovery in coffee consumption also brings a positive sentiment to coffee prices. As will be addressed in a specific section below, data has pointed to the recovery of coffee consumption to pre-covid levels in the United States. Recently, the International Coffee Organization itself raised its estimates for coffee consumption in 2020 by 247,000 bags, to 167.258 million bags. 

On Friday (15), GCA stock at US ports data for September will be released. The stock data from GCA gives an overview of the coffee dynamics in the US domestic market. The latest report showed an increase of 56,000 bags in August, but this was still 9% less than in August 2020. For September, stocks have fallen by approximately 100,000 bags on average over the last five years. Considering the pace of consumption in the United States, the seasonality of stocks and logistical problems, which may be affecting the arrival of coffee at ports, the GCA report is expected to point to a significant reduction in stocks in September, which could have a bullish effect on prices.

Overall, from a fundamental perspective, the market sentiment is still positive. Despite the return of the rainfall, which brings a bearish sentiment, several bullish factors should support prices. Among them are the negative S&D balance, the losses for the production potential in Brazil next year, the logistics crisis, the La Niña occurrence with expectations of excess rainfall in Central American countries, Colombia, and Asia, etc. This week, the market will be keeping an eye on certified coffee stocks, the weather in Brazil, Brazilian coffee export data, the NOAA update, and the release of stock data by the GCA on October 15. 

The global COVID-19 pandemic impacted coffee consumption globally, as offices closed and coffee shops were forced to shut their doors. While there was some compensation in the form of a shift from out-of-home to in-home coffee drinking, overall, it is estimated that in the height of the pandemic, people were simply drinking less coffee.

However, with the roll out of vaccines, the reopening of many economies and a gradual return to what
will now be know as the “new normal,” new data suggests that demand has been returning to prepandemic levels.

In the newest edition of the National Coffee Association Drinking Trends Study, data shows that coffee consumption in the US is trending toward recovery of pre-pandemic routines. Out-of-home coffee consumption is up 16% since January 2021, nearly back to January 2020 levels, Overall, signs point to Americans venturing away from home again with coffee consumption during travel/commute rising 9%, at an eating place rising 20% and consumption at work up. The report noted that COVID restrictions hit young people hard, but younger generations’ coffee drinking is on the rise again. 71% of Americans are already visiting coffee shops or plan to in the next month Up nearly 50% since January 2020. Ordering out via Drive-through and app remain well above pre-pandemic levels.

Source: Refinitiv. Design: StoneX.

Managed money participants opted to reduce the Robusta net long last week, with the
position being reduced by 392 lots to total 33,753 lots. The reduction was predominantly
driven by a reduction to the gross long position which fell by 264 contracts to 36,493, while
the gross short was reduced by 128 contracts to 2,740. 

The week was marked by higher risk aversion in the main global markets due to concerns about a possible crisis in the supply of important energy matrices worldwide. It led the WTI oil price to its highest level in seven years, while natural gas reached its highest level in over seven years. Contributing to investors' caution was the standoff between Republicans and Democrats over the approval of a measure to suspend or raise the American public debt limit in Congress, to prevent the country from defaulting for the first time in its history.

According to the Treasury secretary, Janet Yellen, if the United States default, it would lead to "catastrophic" effects, compromising the reputation of the American debt security as the safest asset in the world, causing turbulence in the financial market and a possible recession. At the end of the week, the country's Senate managed to reach an agreement to temporarily approve an increase in the debt limit, which brought some relief to agents. However, a definitive decision should be debated and voted on only in December.

On Friday, the lower employment generation in the United States also raised doubts about the pace of the American economic recovery. According to the Bureau of Labor Statistics (BLS), the balance between hiring and firing in September was 194,000 jobs, while market expectations pointed to 475,000. Thus, the American labor market has shown difficulties following a consistent pace in its recovery, which raises doubts about whether the Fed will maintain the expectation of tapering in the face of "incomplete" recovery in the labor market.

In Brazil, data brought negative sentiment regarding the recovery of the Brazilian economy in general. Brazilian Institute of Geography and Statistics (IBGE) indicated a deterioration in the recovery outlook for the second half of the year. The monthly Industrial Survey indicated a 0.7% retraction in industrial production in August, the third consecutive month of decline, accumulating a 2.3% retraction in the last three months. In addition, the retail sector showed a 3.1% decline in August, against analysts' expectations of an increase of 0.7%. The continuity of problems in the global supply chain, the high unemployment rates, and the drop in the population's purchasing power in the face of accelerated inflation were among the main factors behind the negative performance. 

The IBGE released the Broad National Consumer Price Index (IPCA) for September last Friday, showing an increase of 1.16% to its highest variation for the month since 1994. In the first nine months of the year, the index increased by 6.9%, high by 10.25% in the last 12 months. Among the main culprits for the result was electricity (+6.47%), with the beginning of the "water shortage" tariff flag, which adds BRL 14.20 to the electricity bill for every 100-kWh consumed, with significant increases also for cooking gas and fuel.

According to the indicator, the ground coffee prices posted an increase of 5.5% in the Brazilian shelves in September, growing 7.51% in August. The results showed that the industry transferred a higher price to the final consumer in the last two months, which may have intensified after the new rally in prices from the end of July when the effects of frost in Brazil raised global prices to new levels. Prices in New York have remained between US₵ 180/lb and US₵ 200/lb since then.

Source: IBGE. Design: StoneX.

When we look at the accumulated result for the year, ground coffee showed an increase of 24.2%, a level well above the IPCA and the group and subgroup in which it is allocated, food and beverages (5.84%) and beverages and infusions (7.27%), respectively. Among the more than 400 products and services surveyed by IBGE, the price of ground coffee ranks 18th in the year's highest growth rate. Soluble coffee shows an

increase below all-products average, with an accumulated increase of 5.08% in 2021.

Source: IBGE. Design: StoneX.