Coffee Weekly Report

Coffee prices ended the week with mixed results, with New York extending losses and London showing a recovery. While the effects of the war continue to put pressure on coffee prices, other bullish factors act to limit losses. Arabica’s most active contract (May/22) ended Friday (11) at US₵ 221.95/lb, a retreat of 230 points (1.0%) compared to the previous Friday (04). In Brazil, the Cepea’s Arabica indicator followed the movement seen in New York and ended the week lower, showing a decrease of BRL 20.42 (1.5%), at BRL 1,305.56/bag.

In contrast to what happened in New York, the Robusta coffee futures ended the week higher. Robusta’s most active contract (May/22) advanced USD 57 (2.8%) to end the week at USD 2,095/t.  On the other hand, the Cepea’s Robusta indicator dropped by 1.22% to end the week at BRL 758.52/bag.
 

As we covered in the last weekly report regarding the war, two main factors contribute to pressure on coffee prices. First, the beginning of the conflict increases the feeling of risk aversion, which decreases investors' appetite for riskier assets, such as coffee. In addition, another problem is linked to coffee consumption in the countries that are involved in the war. For example, USDA data indicates that Russia consumed 4.16 million bags and Ukraine 1.23 million in 2020/21, so the two countries had an annual consumption of 5.4 million bags.

The overall scenario is still uncertain due to the huge uncertainties and concerns surrounding times of armed conflict. However, other bullish factors have supported the market movements even under these conditions. The prospect of lower coffee supplies amidst the problems in Brazil and the weather problems are presenting themselves as bullish factors for the market. 

Excessive rainfall continues to affect coffee production in Colombia. The country recently issued a red alert due to the problems caused by torrential rains; several producing regions have experienced flooding and landslides. In addition to the worrying situation, the weather models have pointed to significant rainfall volumes for the next two weeks, with accumulations exceeding 200 mm in some regions. The rainfall excess in Colombia directly reflects the La Niña occurrence, which has been affecting the world's climate since the second half of 2021.
 

Source: StoneX, with NOAA / NCEP / EMC data (GFS: Global Forecast System), 2021. 

In recent months, the probabilistic models for the El Niño region pointed to the maintenance of the La Niña condition until the autumn in the southern hemisphere but decreased the probability of La Niña during the winter, pointing to the return of a neutral condition. However, the latest data released by the US agency (NOAA) showed an increase in the probability of La Niña maintenance during the winter and the second half of the year. Of course, the long-term forecast models are subject to greater chances of error. But if this scenario is confirmed, with the occurrence of La Niña during the Brazilian winter and its persistence during the second half of the year, the major impact would be delayed rains and problems with crop development, as was observed in 2020 and 2021. Therefore, monitoring this condition is crucial to anticipate market trends. 

Source: NOAA. Design: StoneX.

Furthermore, we will enter the Brazilian winter in a few months, and the arrival of new cold waves should bring volatility to the market. In an event organized by the National Coffee Association (NCA) and covered by CoffeeNetwork, the president of World Weather Inc., Drew Lerner, indicated that there is a strong relationship between frost events in Brazil and the solar minimum, the time of the cycle when the sun has less activity. 

According to Lerner, the last solar minimum happened in 2020, but 2022 is still within the window of possibility for the phenomenon to occur. However, given the frost of 2021, he recalls that multiple frost events in the same solar minimum period have been less likely since the 60s. Despite the uncertainties, cold waves tend to affect the market and cause greater volatility. 
 

Last Friday (11), the Brazilian Coffee Exporters Council (Cecafé) released data on Brazilian exports in February. According to the council, Brazil exported 3.15 million bags of green coffee in February, posting a 14.3% decrease compared to the same month in 2021, when the country exported 3.67 million bags. Exports of the Arabica variety totaled 3 million bags, representing a 10.2% year-on-year decline. Robusta exports totaled 129.8 thousand bags, a decrease of 58.6% compared to the same month last year. 

BRAZIL'S MONTHLY GREEN COFFEE EXPORTS (THOUSAND BAGS)

Source: Cecafé. Design: StoneX.

 

 

Since the beginning of the current crop year (July-Feb), Brazil has exported 23.67 million bags, 20.2% less than in the same period last year. Arabica coffee exports were 17.8% lower during this period, and Robusta coffee exports were 39% lower. The strong decline in exports results from the lower production in Brazil and the logistical problems faced. In addition, the stronger decline in Robusta exports is due to differential movements. 

The sharp decline in exports results from the strengthening differentials for Robusta coffee in Brazil compared to the London benchmark. The last StoneX report showed that the differentials have been positive since mid-January, reaching +USD 156/t in early February but have fallen in recent weeks. Between July and October 2021, the differentials were also positive, with the premium peaking around USD 360/t in October. The strengthening of differentials indicates the greater appetite of the domestic industry and discourages the export of Robusta. 
 

Seasonality of Robusta differentials in Brazil (USD/tonne)

Source: ICE, CEPEA. Design: StoneX.

Last week, the USDBRL returned to test levels close to BRL 5.00, with the real/dollar pair dropping 0.5% to close Friday (11) quoted at BRL 5.05. The US currency has accumulated a 9.3% drop in the Brazilian forex market in the year. On the other hand, the dollar index advanced 0.5%, reflecting the tensions in the international market around the war between Russia and Ukraine, and closed quoted at 99.1 points.

The risk-averse sentiment should remain among global investors. Last week, the United States moved ahead with sanctions on Russia, banning Russian oil imports and blocking imports of several other products, notably vodka, seafood, and diamonds. The UK has also said it will eliminate oil imports by this year. The measures aim to hit the Russian economy even harder since oil represents a significant slice of export revenues. On the other hand, the Kremlin has restricted exports and imports of a list of products, including feedstocks, to nations it considers "hostile," such as the United States, the United Kingdom, and members of the European Union.

In this context, the Brazilian currency has been favored. Despite the global risk aversion and the search for safety assets, such as the dollar and US treasury bonds, Brazilian assets related to these products have received greater demand from investors due to the strong appreciation of much of the commodities complex. There is also an expectation that Brazil can position itself as an alternative both due to the interruption of countries' trade with Russia, either through sanctions, the fear of being "badly seen" for trading with the country or the fear of suffering defaults after the withdrawal of Russian banks from the global Swift financial system.

However, the effects of the war tend to be reflected in inflation in most countries. Last week, the US Bureau of Labor Statistics (BLS) revealed that the Consumer Price Index (CPI) accelerated by 0.8% in February. Although within expectations, the accumulated figure for the last 12 months reached 7.9%, the highest since 1982. March will likely register an even greater acceleration since the month will capture more of the effects of the war that started in late February on the prices of energy, food and metal commodities. It is worth remembering that the target sought by the American central bank is an average of 2.0% per annum.

Thus, a greater expectation is created for the Federal Open Market Committee (FOMC) meeting, which will take place this Wednesday (16). Fed is expected to follow through with the previously signaled 0.25 percentage point increase, which should continue to increase the attractiveness of the dollar in the current global scenario. However, it will be important to follow the position of the Committee members about how the Fed should behave in the context of the war between Russia and Ukraine and what actions can be taken in case inflation gets out of control in the country. The meeting will also be marked by the release of the first quarterly projections by FOMC members for the main indicators of the US economy, which usually act as a marker for the expectations of agents for the year.

In Brazil, the IBGE released the National Broad Consumer Price Index (IPCA) for February, which showed a rise of 1.01%, slightly above expectations. Thus, the accumulated figure for the 12 months went from 10.38% in January to 10.54%.

According to the report, the price of ground coffee was adjusted by 2.51% for the final consumer, a lower increase than the one observed in January (4.75%), and the lowest monthly increase since May 2021, when it registered a 1.57% increase. However, the accumulated figure for 2022 already reaches 7.38%, with the accumulated figure for the last 12 months rising from 56.87% in January to 61.19% last month. According to the IBGE, instant coffee prices for consumers advanced 1.81% in February, with the year-to-date total reaching 3.93% and the accumulated figure for the last 12 months rising from 13.81% in January to 15.43%.
 

Source: IBGE. Design: StoneX.

The impacts of the war can also be seen in the prices for Brazilian consumers. Last week, Petrobras announced an 18.7% readjustment in gasoline, 24.9% in diesel and 16% in cooking gas prices due to the strong rise in oil prices in the international market. Thus, the IPCA is expected to continue to register an expressive advance in prices in Brazil in March.

The agents’ focus should remain on the Monetary Policy Committee (Copom) meeting that will also take place this Wednesday (16). The signal given at the last meeting of the collegiate was that the Central Bank should raise the basic interest rate (Selic) by one percentage point, from 10.75% to 11.75% per year. However, due to the expectation that the effects of the war will promote a higher than expected growth in prices, it will be important to monitor what Copom's stance will be for its next meetings. The Focus Bulletin of the Central Bank this Monday showed a strong readjustment in market projections, with last week's bets that the IPCA will end 2022 at 5.65%, rising to 6.45%, already significantly above the upper limit of the Central Bank's target of 5.0%. The bets that the Selic rate at the end of 2022 also suffered readjustments, going from 12.25% to 12.75%, implying readjustments in the pace planned by Copom for its next meetings.