Coffee Weekly Report

StoneX released last Thursday (05) the outlook for the coffee market [May-July]; access the full report here.

As presented in the Outlook for the Coffee Market report, the expectation of a more balanced supply and demand (S&D) balance or surplus in 2022/23, after a year with a significant deficit, has cooled agents' concerns regarding coffee supply in 2022/23. Furthermore, during the week, the rising dollar, which reacted to the Fed's decision, put pressure on coffee prices, as discussed in the macro session. Moreover, traders observed the sell-off of contracts by the speculative funds, which still maintain a very long position, in 21.8 thousand contracts, a volume above the last 3-year average, which was 8.5 thousand contracts.

Arabica’s most active contract (July/22) ended Friday (06) at US₵ 210.45/lb, posting a retreat of 1165 points (-5.2%) compared to the previous Friday (29). Following the same trend, in Brazil, the CEPEA indicator for Arabica coffee ended the week with a drop of 1.8%, quoted at BRL 1,244.41/lb – the fall in prices was not as intense as in New York due to the 2.6% rise in the dollar during the week. 

For the Robusta market, prices also ended the week in decline, with the most active Robusta contract (July/22) falling USD 25 (1.13%) and ending the week quoted at USD 2,083. The Cepea's Robusta indicator closed 2.7% lower in Brazil, quoted at BRL 770.84/bag. As already mentioned in other editions of this report, the beginning of the Robusta harvest in Brazil increases its availability and puts pressure on prices.

Despite the doubts that still permeate the next Brazilian crop, Colombia's production has been showing significant losses while suffering from excessive rainfall. Data from the Colombian Coffee Growers Federation (FNC) indicated that the country's production in April totaled 750,000 bags, 7% less than the same month last year. Colombian production continues to be impacted by excessive rainfall in the country, a reflection of the impact of La Niña on the weather. As a result, the accumulated production for the first four months of the year totals 3.460 million bags, 14.5% below the same period in 2021, when the country produced 4.048 million bags. 

The Robusta coffee market keeps a close eye on coffee exports from Vietnam, which have reached higher volumes this year. As presented in more detail in the outlook report, the differentials for Robusta coffee in Brazil are high, while the differentials in Vietnam continue to weaken, indicating the country's increased competitiveness. Thus, Brazilian export volumes have fallen while Vietnamese shipments have advanced.
 

Seasonality of Vietnamese coffee exports (million bags)

Source: Vietnam Customs. Design: StoneX.

Data released by the Vietnamese Customs indicated that Vietnam exported 2.6 million bags in April, 19.2% higher than in April 2021 but 24% lower than the volume exported in March, indicating a slowdown in exports from Vietnam. As we can see in the seasonality of the exports chart, there is a tendency to reduce exports due to the country's inter-crop period. The Vietnam harvest starts in mid-November and continues until January.

As for demand, Starbucks' financial data pointed to strong consumption, but the new cases in China are worrying. With the end of the pandemic in most countries, coffee consumption is recovering. Starbucks data shows that its sales advanced 7% in its fiscal second quarter, which ended April 3. The growth reflects the reopening of economies after the shock caused by the pandemic. However, a point of attention is the new cases of Covid-19 in China, leading the country to readopt restrictive measures to prevent the spread of the disease. 

The latest Commitment of Traders report released by the CFTC showed a slight movement of spec funds in coffee futures and options on the New York exchange. According to the report data, speculators reduced their longs by 1,331 between April 26 and May 3, going for 31,510 contracts. In addition, the short positions also posted a drop, with a decrease of 749 contracts to 9,652 on the exchange. Thus, the spec's net balance slightly declined by 582, standing at 21,858 long positions.
 

Spec funds position in coffee futures and options vs. most active contract on ICE NY 

Source: CFTC, Trader's Pro. Design: StoneX.

Through the chart above, it is possible to observe that since mid-December last year, after stock prices had absorbed most of the impacts of dry weather and frosts on the outlook for Brazilian production and the global S&D balance, prices and the funds' net positions began to relate more intensely, showing very similar movements over the weeks. This suggests that the most intense drops registered in the last few sessions, which extended to reach their lows since November on Monday and do not find a strong explanation on the fundamentals side, have a great influence from speculative funds' technical movements. 

For this week, the attention of the agents is on the release of Brazil’s Cecafé export data. Cecafé's data, in addition to showing the pace of shipments and the possible impacts of the logistical problems in the country's exports, can also help to dimension the size of the impact of the war through the indicators of exports to Russia and Ukraine. Export data released by the Secretariat of Foreign Trade (Secex) indicate that Brazil exported 2.76 million bags in April, representing a 20% decline compared to April 2021. However, it is important to highlight that Secex and Cecafé's data usually diverge, which indicates that the numbers that Cecafé will release may present a different scenario. 

Next week the Green Coffee Association will release the report for coffee stocks at US ports. The last report showed an increase of almost 55,000 bags (0.95%) in March compared to the previous month. As can be seen in the seasonal graph of GCA stocks, there is a tendency for stocks to increase from March onwards. The seasonal pattern of GCA stocks reflects the higher import volumes of coffee from Central America, starting in March/April, and then the volumes coming from Colombia and Brazil in the second half of the year. Therefore, stock data may show substantial advances in April, which would act in a bearish manner for the coffee market. 

Seasonality of coffee stocks at US ports - GCA (million bags)

Source: GCA. Design: StoneX.

The USDBRL recovery continues to be a factor of pressure for coffee quotes on the stock exchange. The US currency recorded its third consecutive week of appreciation against the Brazilian real, with the exchange rate registering a weekly increase of 2.6% to end Friday (6), quoted at BRL 5.073.The dollar index, in turn, maintained its appreciation pace abroad for the fifth week in a row, advancing 0.7% to end the week quoted at 103.7 points, the highest level in 20 years.

Last week was a week of exacerbated volatility in the Brazilian foreign exchange market. The dollar posted a range of more than 10 cents in all sessions, indicating a moment of great uncertainty and instability in global markets.

The main event that influenced the week's oscillations was the decision by the Federal Reserve's Monetary Policy Committee (FOMC), which confirmed expectations and raised the US basic interest rate by 50 p.p. to a range between 0.75% p.a. and 1.00% p.a. What came as a surprise, however, was Fed Chairman Jerome Powell's statement that the Committee was not actively considering adjustments of 0.75 p.p. in the basic interest rate. Nevertheless, despite the statement, the futures market has oscillated over the last few days, even signaling majority bets for a 0.75 p.p. hike in the next meeting, even with Powell's statements.

This dispersion of bets, the main factor for the volatility of the dollar over the last few sessions, should ease this week after the interviews of various members of the FOMC, which should help to clarify the scenario that the American central bank is drawing for the coming months and its next meeting.

The decision on Thursday (5) of the Bank of England (BoE) to raise the country's interest rate by 0.25 p.p., for the fourth consecutive time to 1.0% per annum, also contributed to the oscillations in the international exchange market. Along with the interest rate hike, the BoE increased its projections for inflation in 2022 to 10% and 2023 to 6.6%, historically high levels for the country. In addition, the monetary authority maintained its projection for economic growth of 3.75% in 2022 and revised the 2023 GDP to a change of -0.25%. The forecasts of still high inflation and contraction of the economy in 2023 heated the debates about the possible prolonged effects of global inflation and the possibility of a stagflation scenario in the world's leading economies.

Added to the visualization of this scenario was the advance of the spread of the Omicron variant of Covid-19 in China and the continued adoption of strict measures to contain the spread of the virus, so far without success. Last week, IHS Markit released a result of 36.2 points for the country's April Services PMI, which, together with the Manufacturing PMI result (47.4), indicated the second consecutive month of falling activity in both sectors. It is worth remembering that a PMI below the 50-point threshold signals a contraction in activity in the sector in question, while above 50 points indicate an expansionary condition. Thus, market participants have been increasingly reading about the prospect of lower growth in the country (and consequently the global economy) and a further worsening of global logistics problems, which increases the risk of affecting the coffee chain again.

The Monetary Policy Committee (Copom) confirmed expectations in Brazil and increased the basic interest rate (Selic) by 1.0 p.p., to 12.75% per year. In the statement, the collegiate affirmed that due to the challenging global situation, with the continuation of the Russian-Ukrainian war and the worsening of the Covid-19 situation in China, it will understand the monetary tightening cycle with a next adjustment of "lesser magnitude," with market bets indicating that the Central Bank will raise 0.5 p.p. in June.

This week, the release on Wednesday (11) of the National Broad Consumer Price Index (IPCA) and the Consumer Price Index (CPI) for April in Brazil and the United States should also be highlighted. The decisions will help market participants' projections about the next steps to be taken by the countries’ central banks, with higher-than-expected results tending to contribute to a greater attraction of foreign exchange to the respective currency markets and, consequently, to favor the strengthening of their currencies.