Coffee Weekly Report

Read our latest special analysis  - Coffee flowering remains at risk with La Niña for the third consecutive yea

In a very volatile week, Arabica coffee futures prices ended the week with modest gains. While the continued decline in certified stocks drove prices higher, the return of rain in the Brazilian coffee belt and concerns about the global economy drove prices lower. In addition, the prospect of a recovery in Honduran coffee exports also contributed to limiting gains.

On the exchange rate side, the strong rise of the USDBRL also contributed bearishly to Arabica’s future prices. In New York (ICE), the most active contract (Dec/22) ended the week with an increase of 110 points (0.5%), quoted at US₵ 221.55/lb. In London (ICE Europe), contrary to the movements in New York, Robusta’s most active contract (Nov/22) ended the week with a decline of USD 79 (3.5%), quoted at USD 2153/t.

Weekly intraday (most active contract) – September 26 to 30  

In Brazil, Cepea's Arabica indicator showed an increase of 1.1% and ended the week quoted at BRL 1,286.80/bag, reacting to the advances in New York and the high dollar. On the other hand, Robusta coffee showed a slight decline of 0.5% to close at BRL 737.73/bag.

As was mentioned, the sharp decline in certified stocks of Arabica coffee acted bullishly for Arabica prices. According to ICE data, Arabica's certified stocks decreased 9.7% for the week to 426,800 bags, their lowest level over 23 years. Certified stocks are closely linked to the level of coffee differentials in the origins, so strengthened differentials discourage the certification of new coffees. 

As presented in the special report "Can certified stocks reach zero?", high differentials in origins disfavor the certification of new coffees. In recent weeks, there has been a weakening in differentials at origins, but they are still at unfavorable levels for the certification of new coffees. In Colombia, for example, according to a CoffeeNetwork publication, price differentials have retreated from +80/+82 cents/lb to +60/+62 cents/lb. However, this level is still high for new certifications. 

Expectations of increased Honduran coffee exports also acted bearishly during the week. Nevertheless, according to preliminary data from the Honduran Coffee Institute - IHCAFE, the country's exports could total 5.5 million bags in 2022/23 (Oct-Sept), representing a 17.7% increase compared to 2021/22. Coffee production in the country was greatly affected last year amid the impacts of La Niña, which caused excessive rainfall. 

In Brazil, the weather continues to be in the spotlight. With the arrival of the rainfall, there have already been reports that the main flowering has started in the Arabica coffee-producing regions. Several regions in Minas Gerais have received significant amounts of rain, with towns in the Souther Minas Gerais receiving more than 100 mm of rainfall in the last 15 days and more than 40 mm in the Cerrado region of Minas Gerais. For the next 15 days, accumulated volumes of up to 180 mm are forecast in some municipalities of Southern Minas Gerais.
 

Precipitation history and forecast for the next 15 days  

Source: StoneX, with data provided by NOAA / NCEP / GFS: Global Forecast System), 2022.

Although the forecast is optimistic and indicates a favorable condition for flower setting and early fruit development, the weather issue should still be closely monitored. Recently, the Australian agency BOM and NOAA indicated that La Niña should remain until the end of the year, with conditions in the Pacific Ocean returning to a neutral condition from early next year. Next week, on October 13, the CPC/IRI NOAA probabilistic El Niño/La Niña forecast report will be released.

A great part of the appreciation of the American currency occurred during Monday’s session (26), when the exchange rate advanced 2.5% amidst an environment of strong pessimism in global markets, still reflecting fears that the increasing pace of monetary tightening by the world's main central banks could cause a global recession. This sentiment remained present mainly after the Federal Reserve's decision on the 21st, in which the American central bank indicated that it should continue to significantly raise the basic American interest rate, in addition to maintaining it at a high level for as long as necessary until inflation is completely under control.

Throughout the week, the more cautious tone due to the proximity of the first round of elections contributed to keeping the Brazilian currency lower. However, it is worth noting that on Monday (3), the Brazilian real posted a sharp recovery amid the repercussion of investors to the result verified in the polls last Sunday (2), with a drop of about 4.5% at the time of writing this text. Furthermore, in the presidential race, despite former president Luiz Inácio Lula da Silva attaining the lead with 48.42% of the valid votes, the performance of current president Jair Bolsonaro, with 43.21% of the valid votes, exceeded the expectations shown by the polls, increasing his chances of victory in the second round, to be held on October 30. In addition, the election of a Congress more aligned with the agendas of liberal interests was seen as positive by financial markets, which visualize an easier approval of measures with this bias in case of the re-election of the current head of the Executive.

Throughout October, the electoral polls and debates that precede the decision at the end of the month tend to bring volatility to the FX market. On this week's agenda, the highlights abroad are the release of the Purchasing Managers' Indexes (PMI) of industry and services for September in the US, Europe, and China, in addition to the labor market data for the US last month. In Brazil, besides the results of the PMIs, the agents should also reflect the September trade balance data and the release of the Monthly Survey of Industry and the August Survey of Trade by IBGE.
 

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