Coffee Weekly Report

Without major news, but with fundamentals still positive, amid supply restriction in 2021/22 and lower availability in 2022/23, a greater appetite for speculative agents for Arabica coffee contracts was observed, which advanced even with the USDBRL appreciation in the week. As a result, Arabica's most active contract (July/22) ended Friday (08) quoted at US₵ 231.55 /lb, an advance of 310 points (1.35%) over the previous Friday (01). In Brazil, following the trend in New York, Cepea’s Arabica indicator ended the week higher, showing an increase of BRL 26.17 (2.1%), quoted at BRL 1,271.49/bag.

On the other hand, pressured by the increased Vietnamese exports, the Robusta coffee futures ended the week lower. As a result, Robusta's most active contract (July/22) retreated USD 34 (1.6%) to close the week quoted at USD 2096. In Brazil, supported by the demand in the domestic market, the Cepea’s Robusta indicator showed an important advance of 1.2% and ended Friday (08) quoted at BRL 817.25/bag.
 

On the fundamentals side, the outlook is still positive amid tight coffee supplies in the current crop year and the expectation of lower availability in 2022/23. In addition to the large reduction in Brazilian production, Colombia has been facing an adverse scenario, which has resulted in lower production and added to the bullish sentiment. The latest data from the National Federation of Coffee Growers of Colombia indicated a 13% drop in the country's production in March when 914,000 bags were produced. 

Furthermore, in a new post-monsoon assessment, India has revised its estimates for coffee production. The Coffee Council of India has reduced its estimates by 5.6% for the 2021/22 crop to 5.8 million bags from 6.15 million in the previous estimate. The Arabica estimate was reduced by 8.6% to 1.65 million bags, and the estimate for Robusta was reduced by 4.3% to 4.16 million bags. However, projections still point to a 4.3% increase over the 2020/21 crop year.

Moreover, the end of the pandemic and the recovery of consumption to pre-pandemic levels in the US are bullish factors for the market. The Brazilian Coffee Industry Association (ABIC) recently released consumption data for Brazil between November 2020 and October 2021, indicating that consumption in the country had increased by 1.7%, totaling 21.54 million bags. The expectation of strong consumption adds constructive sentiment to coffee prices.

While the factors mentioned above have acted positively on prices, the impacts of the war between Russia and Ukraine continue to add a feeling of great uncertainty. Data released by the Secretariat of Foreign Trade, linked to the Ministry of Economy, pointed to a strong decrease in Brazilian coffee exports to Russia and Ukraine in March. 

According to SECEX, Brazilian coffee exports to Russia totaled 54.5 thousand bags in March; a volume 36.4% lower than in February and 38.3% lower than the total exported in March 2021 – exports in March were 25.4% lower than the last 3-year average for the month. 
 

Source: SECEX. Design: StoneX.

Following a similar trend, Brazilian exports to Ukraine in March totaled 2,559 bags, a decrease of 69% compared to February. Although there is no difference between March 2022 and 2021, the volume exported in 2022 is 29.6% lower than the last 3-year average for the month. Until the writing of this content, the Brazilian Coffee Exporters Council (Cecafé) had not released the official data on Brazilian exports, but the release is scheduled for the late afternoon and should corroborate the scenario presented above. 

SEASONALITY OF COFFEE EXPORTS TO UKRAINE (THOUSAND BAGS)

Source: SECEX. Design: StoneX.

Going against the trend in New York, the Robusta coffee market was under pressure during the week amid comfortable supply sentiment for the variety, supported by advances in Vietnamese coffee exports. According to data from Vietnam's customs agency, the country's exports totaled 9.7 million bags, high by 28.3% from the first quarter of 2021.  

Source: Vietnam Customs. Design: StoneX.

The increase in exports of Robusta coffee from Vietnam comes amid a sharp drop in Brazilian exports of the variety, as a reflection of the differentials condition. Due to the strong restriction in Brazil’s coffee supply and the high prices of Arabica coffee, the demand for Robusta coffee by industries has increased, resulting in positive differentials in the Brazilian domestic market; last week, the differential between the Cepea indicator for Robusta and the London futures market reached values above USD 800.00/t.

The CFTC's Commitment of Traders report revealed last week that spec funds increased their net long positions in coffee futures and options between March 29 and April 5 on the New York exchange. According to the report, specs increased their long positions by 4,743 while reducing their short positions by 2,918, increasing their net long balance by 7,661 to 23,395 contracts. In the same period, prices increased by 1,545 points, going from US₵ 215.80/lb to US₵ 231.25/lb.

It is important to note that since the beginning of the war between Russia and Ukraine, when a strong wave of risk aversion took the global markets, speculators had been significantly reducing their long positions, going from 58,881 until February 22, the last report before the beginning of the war, to 26,237 on March 29. Furthermore, it is important to note that as fears about the effects of the war cooled, the increase in purchases by funds over the last week was accompanied by a reduction in short positions, which reached their lowest level since January and was also accompanied by a reduction in open positions by speculators. The move signals a possible decrease of the bets on coffee lows and, if consolidated, may strengthen the current bullish fundamentals that have been driving coffee prices back to high levels since the beginning of April.

After five consecutive weeks of appreciation, a period which positioned the Brazilian real as the best performing relevant currency in the world by 2022, the real/dollar pair advanced by 1.0% amid high volatility during the last week, ending the period at BRL 4.712. The American currency showed a range from a low of BRL 4.479 to BRL 4.793 during the week. The dollar index registered a significant advance of 1.2% in the week to close quoted at 99.8 points, its highest close in a week since May 2020.

Besides the higher global risk aversion environment due to the war between Russia and Ukraine, which seems far from its end and presented a cooling off in negotiations between the nations, global markets reacted to the Federal Reserve's more contractionary stance indicated in the minutes of the Federal Open Market Committee’s (FOMC) last meeting. Among its main indications, the minutes showed that the Committee members were more inclined to an adjustment of 0.50 p.p. in the basic US interest rate at its next meeting, which will be held in May, and that they only didn't choose to initiate increases of this proportion as early as March due to the uncertainties brought about by the start of the Russian-Ukrainian war. In addition, the document revealed that members agreed to initiate a reduction of up to USD 95 billion a month in assets on the Fed's balance sheet as another instrument to reduce dollar liquidity in the market.

Given the Fed's firmer stance toward reducing monetary stimulus in the coming months and the prospect of higher US interest rates and, consequently, the yield on the country's fixed-income assets, global investors' demand for the US currency has risen over the past week. The release of the Consumer Price Index (CPI) and the Producer Price Index (PPI) for March in the United States this Tuesday (12) and Wednesday (13) should continue to indicate accelerated inflation in the country, further supporting prospects of firmer adjustments in monetary policy by the Fed and continuing as a favorable factor for global demand for the American currency this week.

In Brazil, the week's highlight was the release of the March National Broad Consumer Price Index (IPCA), which revealed a significant advance of 1.62% in prices, against the market expectation of a 1.3% increase and the biggest advance for the month since 1994. According to the IBGE, the hike occurred mainly due to increases in transportation costs (3.02%), after a new round of adjustments in the average price of gasoline (18.77%) by Petrobras in March, and by the foodstuff group (2.42%). Thus, the first three months of the year have already accounted for a 3.2% hike, with the accumulated figure for the last 12 months advancing from 10.54% in February to 11.30%.

The data contribute to the market's perception that the Central Bank of Brazil should continue to act actively to control inflation. As a result, the basic interest rate (Selic) should increase beyond the probable hike of 1.0% in the next Monetary Policy Committee (Copom) meeting, as signaled in the Committee's last meeting. Thus, the data and the firm stance the Central Bank has been adopting in its latest decisions indicate that the differentials of interest rate yields in Brazil and the United States should remain high, which tends to be positive for attracting foreign investment to the country, and, consequently, favorable to the BRL. Unfortunately, the institution has not released a series of indicators in the last two weeks due to the Central Bank servers' strike, such as the Focus Bulletin. However, it is likely that after the IPCA result, the market projections for the IPCA in 2022 have risen beyond the 6.86% indicated in the last Bulletin released on March 28.

For coffee specifically, the index showed an increase of 2.87% in the prices of roasted and ground coffee to the final consumer, a weaker increase than the one registered in January (4.75%) but higher than the one seen in February (2.51%), indicating that the industry still tends to maintain a significant degree in the monthly repasses to the markets, even if in a lower intensity than the strong adjustments of the second semester of 2021. With this result, the accumulated figure for the last 12 months for ground coffee increased from 61.19% in February to 64.66% in March.

On the other hand, instant coffee registered an increase of 2.53% for the month, after having advanced 2.09% and 1.81% in January and February, respectively, with the accumulated figure for the last 12 months advancing from 15.43% to 15.76%.
 

Source: IBGE. Design: StoneX.