Coffee Weekly Report

By: StoneX Intelligence Brazil, StoneX Intelligence Brazil

Mon, 17 Oct 2022, 18:04

Brazilian exports and inflation pushed down coffee futures prices

Fernando Maximiliano

Leonardo Rossetti

The 7.1% increase in Brazilian exports acted in conjunction with the rising USDBRL and the risk aversion sentiment generated after the US inflation data

HIGHLIGHTS

•   Arabica prices dropped by 2140 points (9.8%) in NY, closing the week quoted at US₵ 196.70/lb.
•   Cepea’s Arabica indicator dropped by 6.45% in the week, quoted at BRL 1,154.73/bag.
•   Robusta prices dropped by 4.8% in London to USD 2051/t.
•   Cepea’s Robusta indicator closes lower by 5.8% at BRL 656.58/bag.
•   Brazilian exports advanced 7.1% in September. ▼
•   Return of rainfall favors the early stages of coffee development. ▼
•   NOAA maintains a high probability of La Niña persistence. ▲
•   Stocks at US ports data will be released today (17).
•   With inflation in the United States and risk aversion, USDBRL appreciates in the week. ▼
•   Higher-than-expected CPI in the US raises expectations of a firm interest rate hike by the Fed. ▼
•   Consumer coffee inflation in Brazil drops for 2nd month in a row. ▲
•   Market should follow the release of inflation data in Europe.

▼ Bearish Factors ▲ Bullish Factors

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

Last week, coffee futures prices fell sharply following the release of Cecafé's data on Brazilian exports and inflation data in the US, as well as concerns over the impact of inflation and the energy crisis in Europe. In addition, with the troubled macroeconomic scenario, the dollar rose sharply during the week, adding to the week's bearish sentiment.

In New York (ICE), the most active contract (Dec/22) ended the week with a 2140-point (9.8%) retreat, quoted at US₵ 196.70/lb. In London (ICE Europe), prices also ended the week sharply lower, with Robusta’s most active contract (Jan/22) ending the week with a loss of USD 103/t (4.8%), quoted at USD 2051/t.

Weekly intraday (most active contract) October 10 to 14

Sources: ICE, Commodity Network Trader’s Pro. Design: StoneX.

In Brazil, Cepea’s Arabica indicator fell 6.45% and ended the week quoted at BRL 1,154.73/bag, reacting to the fall in New York. However, the less intense drop was due to the strong USDBRL. Following the trend of the Arabica, the Robusta coffee saw a 5.8% drop, closing Friday quoted at BRL 656.58/bag.

Brazilian exports increased by 7.1% in September

According to Cecafé's report, released last week, Brazil exported almost 3.4 million bags of coffee in September, resulting in an increase of 4.5% compared to the same month in 2021. Of these, 3.07 million bags were of green coffee, whose exports advanced 7.1% in September. Exports of Arabica coffee advanced 18%, while Robusta exports were down over 60% for the month. Export revenues set a record for September and reached USD 805.5 million, advancing 49.8% compared to September 2021.

The significant increase in exports acted in a bearish way for prices, as it met a point discussed in recent weeks, the prospect of lower availability of coffee at the beginning of the 2022/23 crop. Furthermore, it is worth mentioning that the drop of over 60% in Robusta coffee exports was not due to a restriction in Robusta coffee supply but due to the condition of differentials in recent months, which has hindered the export process.

Seasonality of Brazilian coffee exports (thousand bags)

Source: Cecafé. Design: StoneX.

Since the beginning of the year, the differentials for Robusta coffee in Brazil have remained positive, indicating that prices in the domestic market have been above the level observed in the international market. For example, the differential between the indicator Cepea and the London exchange for the Robusta type reached levels above USD 800/t in mid-April but fell back and remained close to USD 200/t until mid-September, when it fell back to around USD 12/t last week.

Return of rainfall favors the early stages of crop development in Brazil

Since the opening of the main flowering period in producing regions a few weeks ago, market participants have cooled their concerns regarding this stage. However, they have kept an eye on the weather outlook, bearing in mind that any adversity at this time could still cause damage to the next crop.

According to weather data from StoneX, which uses information from the US NOAA, most producing regions have received significant amounts of rain in the last 60 days, with municipalities in the South of Minas and Mogiana reaching more than 160 mm, while the Cerrado had volumes around 90 mm, reaching above average volumes in these regions over the last two months. On the other hand, the regions of Matas de Minas, Espírito Santo and southern Bahia still have accumulations below the historical average for the period.

Despite the advance in Brazilian flowering and favorable weather conditions in some regions, it is still necessary to monitor the weather conditions and rainfall projections in Brazil, especially in regions with below-average rainfall accumulations. In addition, even for the regions that received good volumes, as already mentioned, the coffee crops will still go through other stages of development that are very susceptible to bad weather. Finally, it is worth noting that conditions are still under the influence of La Niña, which should remain until early next year.

According to NOAA's latest update to the probability report, released last Thursday (13), the probability of La Niña maintenance stays above 75% until the DJF quarter (Dec-Jan-Feb). It then drops to 59% in the JFM quarter (Jan-Feb-Mar).

El Niño/La Niña Probability Forecast

Source: IRI/CPC NOAA. Design: StoneX.

Stocks at US ports data to be released today (17)

This week, in addition to the weather, macroeconomic factors and the drop in certified stocks, participants will closely follow the report on stocks at US ports in September, which the Green Coffee Association will release on Monday (17). Last month a higher-than-expected increase surprised some players and contributed to more bearish sentiment.

If new stock increases are verified, this scenario could be accentuated since it could indicate a possible problem in US demand. On the other hand, a possible increase in stocks could also reflect a greater flow of imports. This cannot be verified now, as the USDA will only release the import data for September on November 3. Seasonally, over the last five years, GCA stocks have shown an average fall of over 125,000 bags in September (-1.9%).

With inflation in the United States and risk aversion, USDBRL appreciates in the week

The exchange rate closed high by 2.1% last week, acting as an additional factor for the strong pressure on coffee prices, with the real/dollar ending the period quoted at BRL 5.322. On the other hand, the dollar index posted an increase of 113.2 points (+0.1%.

The main macroeconomic indicators impacting the global markets were the September Consumer Price Index (CPI) and the Producer Price Index (PPI) in the United States. In the spotlight, the CPI, which has an important weight in the Federal Reserve's monetary policy decisions, registered an increase of 0.4% in the month, above analysts' expectations, which projected an increase of 0.2%. Thus, the accumulated over the past 12 months was 8.2%. Also worthy of note is the result for the core CPI, which excludes volatile goods categories such as energy and food, which registered a 0.6% increase against expectations of a 0.4% rise, with the accumulated figure advancing to 6.6%, the highest level since 1982.

The result raised the agents' bets about a new 0.75 p.p. increase in the basic American interest rate in its next decision on November 2. Around 97% of the agents are betting on the adjustment, which should raise the basic rate between 3.75% and 4.00% per annum. This week several Fed members will speak, with the expectation that they will continue to reinforce the central bank's commitment to achieving price stability in the country. It is worth remembering that interest rate increases in the United States reduce the differential between Brazilian and American interest rates, which tends to contribute to a greater outflow of foreign currency and investments from Brazil, acting in a bullish manner for the exchange rate.

In Brazil, the IBGE released that the National Broad Consumer Price Index (IPCA) registered deflation for the third consecutive month in September, with a drop of 0.29%, after having retreated 0.68% in July and 0.36 in August. Similar to previous months, the items that most impacted the result were fuels, such as hydrous ethanol (-12.43%), gasoline (-8.33%), diesel oil (-4.57%), and vehicular natural gas (-0.23%). Thus, the accumulated index for the last 12 months dropped from 8.73% in August to 7.17% in September.

Consumer prices for roasted and ground coffee retreated for the second consecutive month, with a variation of -0.76% after hitting -0.50% in August. Thus, the accumulated figure for the last 12 months fell for the fifth consecutive month to 37.7%, down from 46.3% in the previous month. The tendency is for the accumulated results to continue to decline until the end of 2022, which should reduce fears of a retraction in consumption in the country or the stagnation of its growth. Soluble coffee also registered a negative variation in September, of 0.48%, with the accumulated figure over 12 months dropping from 24.80% in the previous month to 22.92%.

The week's economic indicators are less busy, especially in Brazil. The highlight is the release of the August Economic Activity Index (IBC-Br) by the Central Bank on Monday (17), considered a forecast for the GDP. Abroad, besides the speeches of the Fed members, the autocracy will release on Tuesday (18) the performance of the September industrial production in the United States. Additionally, China reports its third-quarter GDP on Monday, and on Thursday (19), Eurostat will publish the euro zone's CPI for September. The coffee market has closely followed this indicator amid fears of a possible fall in coffee consumption on the European continent.

INDICATORS

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

Coffee

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