Coffee Weekly Report

Please read our latest special analysis - Can certified coffee stocks reach zero?

With tensions cooling on the macroeconomic front, the bullish fundamentals in the coffee market have returned to the forefront. Although coffee futures prices advanced during the week in reaction to the continued decline in certified stocks of Arabica coffee, financial conditions are not favorable for the certification of new coffee. At the end of the week, the market reacted to NOAA's probability forecast for ENSO, which significantly increased the probability of La Niña occurrence. If this scenario is confirmed, the occurrence could cause rainfall delays during the flowering period and affect the potential for the 2023 crop. In addition, the release of the Brazilian export data by Cecafé, which pointed to a decline of 15.8% in July from 2021, contributed to the bullish sentiment in the week. 

In New York, coffee ended last Friday (12) with the most active contract (Dec/22) at US₵ 222.40/lb, a weekly increase of 1600 points (7.75%). In London, Robusta prices increased by 10.7%, with the most active contract (November) closing at USD 2261/t. In London, in addition to the factors that affected the Arabica market, the movement reacted to the continued decline in Robusta’s certified stocks and the 17% reduction in Vietnamese exports in July compared to the previous month. 

In the spotlight, certified stocks of Arabica coffee continued their downward trajectory and ended the week below 700,000 bags, the lowest volume since July 1999. As discussed in the study published in recent weeks, current market conditions do not justify the certification of new coffees by origins. However, as of August 8, a significant increase in coffee pending grading was noted, which exceeded 233,000 bags. 

If these coffees meet the exchange's requirements and pass the grading process, they will be accounted for within the certified stocks. Therefore, the volume of certified stocks could advance over the next few days as this coffee is graded. As noted, due to the high differentials, it is very unlikely that this will be the case for new coffees to be certified by origins. Still, there are rumors that this may be the case for the recertification of previously decertified coffees. Even with the inclusion of these coffees and the possibility of advances in certified stocks, differentials and freight conditions remain unfavorable for new certifications by origin.
 

WEEKLY INTRADAY (MOST ACTIVE CONTRACT) - AUGUST 08 TO 12

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 (12) quoted at BRL 1,300.76/bag, an increase of 3.1%. On the other hand, Cepea’s Robusta indicator ended higher by 1.7% to close at BRL 731.38/bag.

The US National Oceanic and Atmospheric Administration (NOAA) updated its probabilistic projections for the occurrence of El Niño/La Niña last Thursday (11). The data showed a significant increase in the chances of a La Niña until the end of 2022.

The August projections had significant adjustments from the August to October quarter and now point to at least about an 80% chance of the phenomenon occurring by the end of 2022. From the latest updates, it seems unlikely that this trend will change before the flowering occurs. Therefore, in addition to monitoring the probabilities of La Niña, it will be important to check the projected intensity of this phenomenon to understand its potential impact on the crop.
 

Change in La Niña Occurrence Probabilities

Source: IRI/CPC - NOAA. Design: StoneX.

During the week, in addition to certified stocks and the weather, which will continue to be the focus, the agents will turn to the data of coffee stocks at US ports, which will be released today (15) by the Green Coffee Association. Seasonally, stocks tend to be stable or slightly advanced in July before falling from August onwards. For example, according to historical data, stocks advanced by an average of 135 bags in July. However, it is worth remembering that despite increases in recent months, stocks are at historically low levels. 

Alexis Rubinstein

ICE certified stocks have been a major fundamental factor in the coffee market in recent weeks, as we saw stock levels fall to their lowest in over 23 years. As of Friday, stocks were recorded at 571,905 bags, down nearly 74% from the level they were at the same time last year. But adding to the chatter of ICE inventories was the peculiar absence of gradings. From July 11 to August 8, ICE has not recorded the grading of any coffee.

“Grading only takes place when an owner requests gradings, and once grading is requested, it takes several days for the sampling process to be completed and for the samples to arrive in the NY grading room,” Tim Barry with the InterContinental Exchange told CoffeeNetwork in an interview with morning. “There is always a delay between when a lot appears as ‘pending grading’ and when the lot is graded.”

Currently, there are 233,403 bags pending grading, but, according to Barry, the exchange does not provide a breakout of pending certs as new or re-submitted for grading. He did confirm, however, that decertified coffee is allowed to be certified again, indicating that the coffee pending grading isn't necessarily new coffee.

Cecafé reported last week that the country's coffee exports totaled 2.476 million bags in July. The result represents a 21.2% drop compared to the previous month and a 14.9% retraction compared to July 2021, when 2.909 million bags were exported. The main contributions to the poor result came from the 144 thousand bags of Robusta coffee shipped, 64.8% less than the 410 thousand in the same month last year, while Arabica coffee shipped 141 thousand bags (-6.5%) less this year, totaling 2.023 million bags.

Monthly coffee exports from Brazil (million bags)

Source: Cecafé. Design: StoneX.

The results fostered questions as to whether June may have been the top of the strong inflationary advance movement, with last month having marked the beginning of a deceleration trajectory, or the July performance was just a momentary oscillation. In any case, there was a growth in market expectations that the Federal Reserve could ease the pace of basic US interest rate increases. The greater chances of weaker interest rate increases encouraged investors to look for riskier assets, leading to appreciation in stock indexes, emerging currencies and several commodities, such as coffee. Later in the week, statements by members of the monetary authority reiterating the Fed's commitment to price stabilization reduced the impetus for the agents to flee the American currency; however, they did not cancel out the dollar depreciation during the week.

In this context, the market should follow the release of the minutes from the Fed's last meeting next Wednesday (17), in addition to new statements from regional central bank presidents. The goal will be to understand better the monetary authority's inclination to reduce the pace of interest rate hikes, with a possible decrease in the intensity of the latest adjustments, from 75 basis points to a 50 basis point increase in September. In addition, the release of retail sales and industrial production in July this week should also help projections about the performance of an activity in the country in the third quarter and partially reduce uncertainties about the economy's trajectory.

In Brazil, the agents reflected on releasing the minutes of the last Copom meeting. In the document, the collegiate affirmed that it gave less weight to the decoupling of inflationary expectations in 2023, placing more emphasis on 2024 in its decision-making, which reduces, at least for the moment, the need for higher interest rates. Copom analyzed that after the slight increase of 50 basis points in the last meeting, which took the basic interest rate (Selic) to 13.75% p.a., it would make sense to keep the rate at the current significantly high level for a prolonged period. The main message of the minutes was that there is the possibility of a "residual" adjustment, i.e., the last increase of 25 points, but that the base scenario that the Central Bank has worked out is the maintenance of the current level. In theory, in case there are no new adjustments to the Selic, while the Fed is still to make a few more hikes in the United States, over the coming months, there should be a reduction in the difference between the Brazilian and American basic interest rates, which tends to contribute to a reduction in the flow of funds towards the Brazilian currency. The Central Bank of Brazil’s Focus Bulletin released this Monday shows an alignment of market expectations with Copom's position, with the median of the market's projections believing that the Selic will end the year at 13.75% p.a.

Brazil is quite empty of indicators this week; the indicators abroad should again bring great influence on the movements of the Brazilian currency; being important to monitor any political turbulence in the political environment less than two months before the elections.
 

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