Coffee Weekly Report

As a result of a sequence of events, from the problems caused by the pandemic to logistical problems, the reduction in Brazilian production and adverse weather events, coffee prices have shown an impressive increase in 2021. For the Arabica market, there was an increase of more than 79.2% in New York, where prices showed an appreciation of US₵ 99.95/lb. In London, the Robusta market increased by 72.7% or USD 998/ton, in 2021. 

In the Brazilian spot market, the observed increase in coffee prices was even sharper, as the CEPEA indicator for the Arabica variety showed that coffee prices had an increase of 132.5%, closing the year quoted at BRL1,431.58/bag. The Robusta coffee prices, on the other hand, increased by 103.3% in 2021, closing at BRL 828.35/bag. The major increase in Brazilian prices was due to the strong devaluation of the Brazilian currency, which showed a decrease of 5.2% from the US currency – it is important to note that at the closing of the last session of the year (30/12/2021), there was a selling pressure that contributed to weighing on the dollar in the Brazilian market, but if we consider the 29/12/2021 close, the Brazilian real will account for an annual devaluation of 7.7%.

In the last two weeks, the Arabica market has fallen sharply, particularly during the week ending December 23, mainly due to the release of USDA estimates for global coffee supply and demand, which pointed to a surplus of 2.6 million bags in the 2021/22 crop year. However, the Department estimates ran counter to the market's expectations, betting on a substantially negative balance in 2021/22. Moreover, due to the end of the year festivities, the coffee market activity remained calm, with speculative agents predominating and under the effect of macroeconomic factors since there was no major news from the fundamentals side. 

The Robusta market in London showed an important appreciation in recent weeks, mainly reflecting the difficulty the country has been facing to export its production due to high freight costs and the unavailability of containers. According to the Vietnam General Statistics Office (GSO), the country's exports dropped by 6.5% in December to 130,000 tonnes or 2.17 million bags, while exports in 2021 dropped by 2.7% to 1.52 million tonnes or 25.33 million bags. 

In the coming weeks, the coffee market will keep an eye on export data from producing countries, mainly Brazil, Vietnam and Colombia, which should be released over this and next week – export data has been an important thermometer of global logistical problems in coffee exports. Brazil has been one of the countries that have faced major challenges in exports due to high costs and lack of containers. As for Colombia and Vietnam, they are still harvesting, and exports are crucial for these countries’ production flow. Moreover, it is worth remembering that we are still under the La Niña effect, which is associated with excessive rainfall in Colombia, Central America and Asia. 

The coffee market should monitor the Brazilian 2022/23 production on the fundamentals side. From now on, several estimates should be released, which will dictate the market pace, as it is still waiting to understand the real impact of the frost and dry weather on Brazilian production. StoneX will release its estimates for the Brazilian coffee production in February.

Accordingly, the rainfall regime in the first months of the year should be closely monitored. Like what happened in 2020, below-average rainfall can inhibit the development and filling of cherries in places with a good post-flowering period or inhibit the recovery of potential in locations where flowering did not occur optimally. Looking at the last few months, the good rainfall volumes during October, generally close to or above the historical average in most of the coffee belt, helped to eliminate or reduce the water deficits in the most affected areas of Southern Minas Gerais, Cerrado and Mogiana. However, November and December, already under greater influence from the La Niña effects, again registered levels below the historical average in the main Arabica coffee-producing regions, as shown by the maps below.

Fonte: StoneX, com dados fornecidos pela NASA (Global Precipitation Measurement / GPM), 2021.

 

The record keeps the warning signal for the possible impacts of continued below-average rainfall. Data from the National Oceanic and Atmospheric Administration (NOAA) in the United States report a high probability that the La Niña effects will remain at least until mid-March or April, with an intensity that can vary from weak to moderate. In Brazil, the weather phenomenon may continue to promote the reduction of rainfall to some extent, although less intensely than in the second half of 2021. On the other hand, the La Niña occurrence at this time of year is also associated with milder weather in most areas where coffee production is concentrated in the country, limiting the impact of the lack of rainfall in building an environment that is too dry and harmful to coffee trees.

EL NIÑO/LANIÑA PROBABILITY FORECAST

Source: IRI/CPC.

La Niña may also continue to affect other important producing countries through the effects of excessive rainfall. For example, Colombia and Vietnam are heading towards the final harvest stage, while Indonesia and Central American countries should continue until February and March. The torrential rainfall volumes have already brought remarkable detrimental effects on the quality of the Colombian crop, which is expected to produce less than 14 million bags in 2021/22 for the first time in 7 years, according to the National Federation of Coffee Growers. Thus, it will be important to monitor rainfall indicators for other producers since their harvest could be affected somehow, making the flow of this coffee to major consumer centers even more difficult.

In a week marked by high volatility, the USDBRL closed last Thursday (30) with a weekly depreciation of 1.8%, with the real/dollar pair quoted at BRL 5.573. Sharper variations are characteristic of the last trading sessions of the year due to the reduced volume of trade with the absence of part of the market participants because of the Christmas and New Year holidays. 

Until the beginning of the week's last session, the exchange rate was heading to end the period near the BRL 5.70 level. Then, however, the American currency showed a sharp drop to end the day with a strong daily drop of 2.1% in a few hours. As explained in the Foreign Exchange report, a large part of this movement occurred between the times used by the Central Bank of Brazil for the PTAX rate formation, i.e., between the 10:00 am and 1:10 pm bulletins. The PTAX rate is a reference published daily by the Central Bank, and its end-of-month value is widely used in foreign exchange contracts and derivatives.

Therefore, in the last business day, traders intensified their transactions by competing for the formation.
Thus, the real/dollar pair closed with a retraction of 0.7% from November's close, ending 2021 with an appreciation of 5.2% compared to the end of 2020. The dollar also appreciated against currencies of other emerging economies, such as the Indian rupee (2.0%), the Russian ruble (1.0%), the South African rand (8.9%), and the Turkish lira (79.2%).

Among the main currencies in the coffee market, the Colombian peso registered a significant advance during the year (19.0%), which led, like that observed in Brazil, to an increase in prices in the country's domestic market. The American currency also advanced against the Indonesian rupiah (1.5%) and the Honduran lemur (0.7%), falling only against the Vietnamese dong (-1.1%).

VARIATION OF THE MAIN CURRENCIES for THE COFFEE MARKET IN 2021

Source: Reuters. Design: StoneX.