Coffee Weekly Report

Read the latest coffee special report - Can certified stocks reach zero?

Last week, Arabica coffee prices advanced by 2475 points amid concerns about the weather in Brazil, the yield of the current crop and technical aspects, and the USDBRL drop during the week. On Thursday (25), the most active contract in New York, ending the session at US₵ 239.50/lb, surpassed the high seen in early June and reached its highest daily close in the last six months, the highest value recorded since the beginning of the war between Russia and Ukraine. By the end of the week, prices increased by 11.6%, with the Dec/22 contract closing at US₵ 238.10/lb. In London, Robusta had a smaller increase, with the most active contract (November) high by 3.4% and closing the week quoted at USD 2279/t. 

Weekly intraday (most active contract) – August 22-26  

Following the trend observed in the international market, the prices of Arabica coffee in the domestic market ended the week with a strong increase, but with less intensity, due to the USDBRL depreciation. Cepea’s Arabica indicator ended Friday (19), quoted at BRL 1,351.64/bag, an increase of 5.95%. On the other hand, Cepea’s Robusta indicator ended high by 1.3% to close at BRL 747.21/bag.

Coffee trend in 2022 - New York

Source: ICE. Design: StoneX.

As already presented in other editions of this report, the US NOAA attributes a high probability for the maintenance of La Niña until the end of the year, which may impact the rainfall in the coffee belt during the second half of the year, the period when the flowering of coffee occurs, a critical moment for the development of the next crop in Brazil. The weather in the country has been a concern for agents since the rainfall volume has been well below average in the last 60 days in Minas Gerais, as seen in the anomaly map. 

Part of the market reaction this week was linked to the precipitation forecast models, which still indicated dry weather for the next few days. However, today's StoneX precipitation forecast report indicated important rainfall volumes starting September 6 and 7, which may cool the agents' worries and, if it occurs, contribute to the development of flowering. It is important to mention that a continuous rainfall regime is necessary for a successful blooming, and drought after the first rains has great potential for damage.  

Another factor that has drawn agents’ attention is the possibility of a shortfall in the current Brazilian coffee crop. Many players, including cooperatives, have indicated that the Arabica coffee production in the Cerrado, Sul de Minas and Mogiana regions would be below expectations. The scenario of an even lower production, which is already below potential due to frost and dry weather, further accentuates concerns about the supply of coffee in the current crop year and acts high on coffee prices.

Oscillations in certified stocks also tend to continue as a sensitive topic in the sentiment of market participants. On the New York futures market, Arabica coffee stocks ended Friday with a weekly increase of 48,000 bags (7.9%), reaching 658,000. The strong variation in coffee pending to be graded, which registered a reduction of almost 96 thousand bags (-41.9%) to 132 thousand, was noteworthy. However, a total of 136.6 thousand bags were sent for grading to be incorporated into stocks during the period. Of these, 82.2%, or 112 thousand bags, were approved, the main reason for increases in official stocks, while 17.8%, or 24 thousand, were disapproved. Considering that 112 thousand bags were approved, but the stock increase was only 48 thousand, we can conclude that while 112 thousand bags were being included, a large volume was withdrawn from certified stocks.
 

 Grading of coffees on the exchange’s certified Arabica coffee warehouses 

Source: ICE. Design: StoneX.

In the coming days, the attention will turn to the export data of the countries, which will be released in the next two weeks. In addition, the market will keep an eye on Brazil's weather and certified Arabica coffee stocks. In addition, macroeconomic factors, including the Brazilian currency and concerns about the global economy, may contribute to coffee price volatility. 

Fertilizer/coffee exchange ratio retreated in recent weeks

In addition to concerns about the weather, the fertilizer issue has great relevance in the second half of the year since coffee fertilization is concentrated in this period of the year. Furthermore, after the outbreak of the Russian-Ukrainian war, many doubts have been raised regarding the availability and price of fertilizers in Brazil. However, the exchange ratio – an indicator of how many coffee bags are necessary for the acquisition of 1 tonne of fertilizers – of Urea, Potassium Chloride, and MAP are still above the average of the last five years but close to or below the level observed last year and in better conditions than the levels observed in the first semester. 

Coffee/Fertilizer exchange ratio (bags/TMT)

Source: StoneX. Design: StoneX.

 

SAM has an exchange ratio below that observed in 2021 and below average in the last five years. Therefore, as we can see, ratio levels for most fertilizers are still above average but far from historical highs. This indicates that, despite the not-so-favorable scenario, crop fertilizer levels should be maintained if this condition remains.

Despite greater risk aversion in the world, the Brazilian real strengthens during the week

Going against the majority of the global currencies, the USDBRL ended last Friday (26) lower in the Brazilian exchange market, supporting the strong increases in coffee prices during the week. The real/dollar pair registered a weekly drop of 1.7%, ending the week quoted at BRL 5.079, the lowest value in the last two weeks. On the other hand, the dollar index increased by 0.6% to close at 108.8 points, renewing in the last sessions its highest levels in nearly 20 years.

Global markets followed the week in a more cautious tone while agents waited for the end of the Jackson Hole Symposium. This event brings together monetary authorities from the United States and the world, where attention was focused on Fed Chairman Jerome Powell's speech on Friday (26).

As highlighted in the FX Weekly report, the speech showed that the American central bank should be aggressive in raising interest rates and avoid premature moderation in its monetary tightening until it consistently regains price stability. Powell indicated that the Fed would be willing to tolerate an economic recession to that end. The expectation for higher yields on fixed income assets in the United States has raised the flow of capital towards the American currency, pressuring equity markets and other currencies.

This week, agents should reflect the August manufacturing PMI for the United States, which ISM will release on Thursday (1), and the August Employment Situation Report, published by the Bureau of Labor Statistics (BLS) on Friday (1). A slowdown in industrial production growth and lower job creation than July is expected.

In Brazil, the domestic currency showed a better performance than most of the world's currencies, following the pattern of greater attractiveness of the real observed since the end of July. Among the main domestic factors are the local interest rate at a significantly high level and the greater inflow of foreign currency into the country's stock market, which has been occurring more intensely since mid-July, amidst improved projections for inflation and the country's GDP this year. Foreign factors also act favorably on the Brazilian real, such as the maintenance of high commodity prices in the international market and the prospect of greater exports to China, which has faced problems with drought and risks of crop failures.
 
This week, on Tuesday (30), the General Price Index - Market for August will be released by the Getúlio Vargas Foundation (FGV), which should indicate a slowdown in August. On Wednesday, the IBGE's monthly National Household Sample Survey (PNAD) for July will update the unemployment rate at the beginning of the semester. Finally, on Thursday (1), the market should reflect the country's Gross Domestic Product (GDP) result in the second quarter, released by IBGE. The projections show slightly slower growth than the 1.0% registered in the first quarter.

It is also worth mentioning that the new Datafolha institute voting intention survey will be released on Thursday. This will be the first update after the presidential candidates' interviews on the Jornal Nacional news program last week and the debate between candidates last Sunday (28). With the elections just over a month away, significant changes in voting intentions can affect the foreign exchange market movements in the country.
 

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