Coffee Weekly Report

Despite the relatively positive condition on the fundamentals side, with the sharp drop in certified stocks, coffee prices were heavily influenced by macroeconomic and exchange rate factors. Concerns about a possible global economic recession fed the feeling of risk aversion, which promoted a strong increase in the dollar index and the flight of investors from risky assets, such as commodities. As a reflection of this movement, the Arabica coffee prices ended the week with a drop of 420 points (1.9%) for the most active contract (Sept/22), which ended the week quoted at US₵ 220.45/lb.

On Robusta's fundamentals side, preliminary export data released by the GSO in Vietnam indicated that the country's June exports were expected to total 2.4 million bags, posting a 13.3% increase compared to the same month last year. However, official data released by the Vietnam Customs Authority last week indicated that Vietnam's exports dropped by 3.5% in June to 2.29 million bags. Despite this scenario, cumulative exports for the first nine months of the Vietnamese crop year, which began on October/21, indicated that the country exported 22.07 million bags, an increase of 13.9%. 

Following the movements in New York, Robusta coffee futures contracts ended the week lower, pressured by macroeconomic factors. Moreover, another factor contributing to pressure Robusta prices down was the significant advance in certified stocks of the type, which have grown amidst the arrival of Vietnamese coffee, mainly coffee from Indonesia. In London (ICE Europe), the September contract closed Friday's session quoted at USD 1981/t, down by 1.25%.
 

Weekly intraday (most active contract) - July 04 to 08

Following the movement in the international market, the Arabica coffee prices in the Brazilian domestic market ended the week lower. Cepea’s Arabica indicator ended the week quoted at BRL 1348.87/bag, a decrease of 0.7%. On the other hand, Cepea’s Robusta indicator ended high by 0.4% to close at BRL 706.76/bag. 

Regarding Arabica’s certified stocks, there has been no change in the scenario observed in recent weeks. During the week, Arabica’s certified stocks fell by over 64,000 bags and broke the 800,000-bag mark, closing the week with just 789,981 bags. As already mentioned in other editions, the differentials at high levels and the freight costs at relatively high levels discourage new certifications. In addition, further drops in stocks are likely to occur since it makes sense to decertify coffees amid the current differentials and freight situation. 

With no major changes in fundamentals, the coffee market will continue to keep an eye on the movements of Arabica's certified stocks. In addition, the weather in Brazil is in the spotlight as agents try to anticipate what could affect coffee flowering to begin in the coming months. In addition, export data from Brazil should be monitored, and the GCA should release the US stock data on Friday (15).

The import data released by the USDA indicated that the US imported 1.8 million bags of coffee in May, down by 23% to April and 17% to May 2021. However, when we analyze the accumulated imports (Jan-May), the US imported 10.14 million bags, an increase of 6.8% from the same period last year. 

Seasonality of US coffee imports (million bags)

Source: USDA. Design: StoneX. 

When considering coffee stocks at American ports, there has been a drop of 19.5% in the volume of coffee that was internalized. In other words, the volume of coffee that left the ports, for a total of 1.74 million bags - indicator calculated from the balance between imports and coffee stocks in ports. However, the accumulated volume of this indicator for the first five months of the year totaled 9.96 million bags, a 5.3% increase compared to the same period last year. Despite the sharp decline in imports in May, this scenario should be viewed with caution, given the still existing problems in global logistics chains amid the Covid-19 pandemic.

EXCHANGE RATIO BETWEEN COFFEE AND FERTILIZER IN BRAZIL HAS DROPPED SIGNIFICANTLY IN RECENT MONTHS

On the fundamentals side, the coffee crop development for the next season continues to be in the spotlight, as agents, in addition to monitoring the weather, evaluate the exchange ratio and the possible fertilizer level in coffee crops. This factor is directly linked to its production potential. With the adversities brought by the Covid-19 pandemic and the beginning of the Russian-Ukrainian war, great uncertainties regarding the availability and potential use of fertilizers were created. 

One of the most important indicators is the exchange ratio between coffee and the main fertilizers, which shows how many bags of coffee are needed to buy 1 tonne of the main fertilizer. The lower the exchange ratio, the more affordable the fertilizer is for the producer, while a high exchange ratio is unfavorable for the producer. 

Exchange ratio between coffee and fertilizer (Urea, KCl, MAP and AMS)

Source: StoneX. Design: StoneX.

The urea exchange ratio has dropped sharply in recent months, falling from almost 3.5 bags/ton in April to less than 2 bags/ton in June, an index within the 5-year average and substantially below the level observed last year. On the other hand, the potassium chloride (Kcl) exchange ratio retreated from its high but advanced again, positioning itself at a high level, above that observed in 2021 and well above the 5-year average. 

As with Urea, monoammonium phosphate (MAP) and ammonium sulfate (AMS) have shown a strong decrease in their exchange ratio with coffee in recent months but are still above the average of the last five years but at a similar level to that observed in 2021. 

As mentioned, potassium chloride remains the fertilizer least accessible to producers, while urea remains the fertilizer with the best exchange ratio. However, considering the current scenario, despite the high exchange ratio for KCl, fertilizers, in general, remain accessible, which may contribute to an adequate fertilizer supply to producers. 

 

However, the positive surprise in the higher-than-expected US labor market data in June indicated that the monetary authority might maintain the pace of intense interest rate hikes in the decision at the end of July. According to the Bureau of Labor Statistics (BLS), in June, a net balance of 372,000 hirings was recorded, a number well above the median of market bets, at 268,000, and only slightly below that observed in May when 384,000 jobs were created. Additionally, statements from an FOMC member reinforced the monetary authority's inclination to follow through with a new adjustment of 75 basis points at the meeting later this month, in addition to stating that they consider it appropriate to take the basic rate to 3.5% p.a. until the end of 2022. Therefore, it will be important to follow the statements of the other Fed members this week to verify if the strong intensity of monetary tightening continues as a unanimous opinion among the collegiate.

In Brazil, the political news, with the advancement of the PEC for income transfer programs and its approval in a special commission in the Chamber of Deputies, dominated the attention during most of the week, amid concerns about the deterioration of the country's fiscal statistics. The proposal includes an increase in the income transfer program and aid for buying bottled gas, subsidies for ethanol and free transportation for the elderly, the creation of a BRL 1000 voucher for independent truck drivers and a gasoline aid for taxi drivers at an estimated cost of BRL 41.25 billion, which does not respect the spending cap rule or provide any counterpart on the revenue side. To evade the electoral law, which prohibits the creation or expansion of social programs in an election year, the text of the PEC institutes a state of emergency in Brazil. The expansion in the imbalance of public accounts and the debt tends to be accompanied by the demand for a higher risk premium by investors, which, in turn, may weaken the flow of foreign capital to the country and the BRL.

The release of the National Broad Consumer Price Index (IPCA) by the IBGE on Friday revealed that prices rose 0.67% in June, in line with what had been expected by the market, but once again indicating acceleration by surpassing the 0.47% rise posted in May. With this, the accumulated figure for the last 12-month period advanced from 11.73% in the previous month to 11.89%, marking the tenth consecutive double-digit month for the index.

The report revealed a slowdown in the price increase of roasted and ground coffee to the Brazilian consumer, which recorded an increase of 0.21%, the lowest variation since February 2021, when it fell by 0.23%. With this result, prices registered an advance of 14.87% in the first half of 2022, with the accumulated in 12 months falling from 67.0% in May to 61.8% last month. On the other hand, instant coffee marked a 0.65% increase in prices in June, also below the 3.58% registered in the previous month, but with a 12-month increase from 19.22% to 22.12%.

Evolution of roasted and ground coffee inflation in Brazil over the last 12 months

Source: IBGE. Design: StoneX.

Sources: ICE/NY; ICE/EU; B3; Commodity Network Trader’s Pro.