Coffee Weekly Report

Macroeconomic factors continue to play a leading role in price movements in the international market. Besides the situation of the prolonged war between Russia and Ukraine, which generates uncertainties and the feeling of risk aversion, other macroeconomic factors also acted in a bearish way - the market was under pressure all week, advancing only on Thursday (21) with the absence of Brazil due to the Tiradentes holiday. 

On Tuesday (19), the International Monetary Fund cut its expectations for global economic growth in 2022 from 4% to 3.6%, citing the war in Ukraine, which pressured commodity prices broadly on the week, with the CRB commodity index retreating 2.9% on Tuesday. Moreover, with lower growth and inflationary pressure in the US, the market is expecting a more intense increase in the basic interest rate by the Fed, which supported a strong advance in the dollar index - on Monday, the president of the St. Louis Fed, James Bullard, commented that due to the increase in prices, an increase of 0.75 point should not be disregarded and he thinks it is appropriate to raise the basic interest rate to 3.5% by the end of the year. 

Prices were under pressure during almost the entire week, but there was a strong advance on Thursday, reflecting the Tiradentes holiday in Brazil, which, combined with other technical factors, contributed to a strong movement of hedging short positions. Thus, Arabica’s most active contract (July/22) ended Friday (22) quoted at US₵ 227.15/lb, posting an advance of 340 points (1.5%) over the previous Thursday (14). In Brazil, the Cepea’s Arabica indicator ended the week almost unchanged, showing an advance of 0.3%, quoted at BRL 1,243.89/bag.

The prices slightly increased for the Robusta market, with Robusta's most active contract (July/22) advancing USD 17 (0.8%) and ending the week quoted at USD 2,116. In Brazil, the Cepea’s Robusta indicator ended the week almost unchanged, quoted at BRL 821.97/bag.

With the approach of the Brazilian winter, StoneX once again publishes the minimum temperature forecast report for coffee-producing regions in Brazil. In addition to the forecast, the report brings the frost warning if the models indicate any risk for the producing regions. Besides the fact that the market naturally reacts to the drop in temperature in Brazil during winter, this tendency tends to be more intense this year since frost has damaged many coffee crops in 2021. 

The stocks at US ports data, released on 04/18 by the Green Coffee Association (GCA), indicated that stocks advanced by 54,950 bags (0.95%) in March, totaling 5,820,289 bags at the end of the month. This volume is 2.5% higher than in March 2021 but is 3.6% lower than the 5-year average for the month.

SEASONALITY OF COFFEE STOCKS AT US PORTS (MILLION BAGS)

Source: GCA. Design: StoneX.

Despite the observed advance, which to some extent attenuates the current feeling of limited supply, the observed volume is still below the psychological level of 6 million bags. In addition, it is important to note that seasonally it is natural for stocks to increase during this period. As can be seen in the seasonality chart, stocks tend to advance from March until mid-July/August, when they fall back again. 

The latest report released by ECOM increased the estimate for coffee production in 2022/23 by 0.11% to 171 million bags, while consumption was estimated at 172.3 million bags, resulting in a deficit of 1.3 million bags. For 2021/22, the company estimated production at 158.7 million bags and consumption at 171.1 million bags, resulting in a negative balance of 12.4 million bags. 

As mentioned in other editions of this report, the discrepancy in coffee estimates is the main challenge and the major source of volatility. The figures quoted above are just one more study that has had a difference between the highest and lowest estimates of 15 million bags in 2021/22 and 4.7 million bags for 2022/23, considering the estimates available. For 2022/23, only estimates from private entities have been released to date, with USDA and ICO estimates not yet published.

Source: StoneX, USDA, ICO. Design: StoneX.

The end of last week was marked by a strong rise in the Brazilian foreign exchange market. After accumulating a 1.7% weekly drop until Wednesday (20), the American currency returned from the Thursday (21) holiday registering a 3.8% advance in the last trading session of the week, the highest daily rise since March 16, 2020, when the Covid-19 pandemic was declared global. 

The exchange rate reflected, in part, the continued highs of the dollar in the international market, as the perspective that the Federal Reserve will continue a cycle of more aggressive monetary tightening consolidates; however, the main highlight was the agents' perception of deterioration in the domestic fiscal and political scenario. The dollar index renewed its highs in more than two years, closing the week with a 0.8% advance, quoted at 101.1 points.

The strong rise of the USDBRL contributed to limiting the recovery of the coffee prices started in New York on Thursday (21) at the end of the week and continues to contribute to pressure on the commodity prices at the beginning of this week.

The strong reversal of trend in the domestic currency scenario was associated with new investor concerns about a possible institutional crisis between powers in the country after President Jair Bolsonaro announced a decree granting a pardon through a "constitutional grace" to federal deputy Daniel Silveira (PTB-RJ). Silveira had been sentenced by the Federal Supreme Court (STF) to prison for more than eight years and lost his mandate and political rights for the crimes of coercion in the course of proceedings and incitement of actions to prevent the free exercise of the powers of the Republic, in a case that began in February 2021, when the parliamentarian released a video on his social networks where he advocated the removal of ministers of the STF and the closure of the court.

Bolsonaro's pardon, a measure that can only be used by the president of the Republic and provided for in the 1988 constitution but never used since, grants the pardon of the judicial sentence to the congressman, representing a direct insult by Bolsonaro to a decision by the leaders of the Judiciary and raising tensions between the Powers. The concern with instability and uncertainty that a new institutional crisis could bring to markets in the country, aggravated by the approaching presidential elections, contributed to keeping investors away from Brazilian assets at the end of last week. The upward trend for the dollar extends into Monday's opening (25), with agents following the unfolding events of the last few days, with the political news once again having an important weight on the foreign exchange market this week.

Abroad, the Fed's perception should lead the monetary tightening cycle among the world's major economies. The possibility that logistic bottlenecks will worsen with the extension of lockdowns in major Chinese cities, mainly Shanghai, should continue to be on the markets' radar.