Coffee Weekly Report

Without big news regarding fundamentals, Arabica futures prices ended the last week lower. The prospect of large production in Brazil in 2023/24 continues to pressure future prices. During the week, the most active contract (Mar/23) ended with a drop of 445 points (2.7%), closing the week quoted at US₵ 158.15/lb. On the other hand, Robusta futures in London ended the week with an increase of USD 18/t at USD 1864/t. 

Weekly intraday (most active contract) - Dec. 5 to 09

Following the market movements in New York, but with less intensity, the prices of Arabica coffee in Brazil showed a slight decline in the week, ending Friday (09) with the Cepea indicator quoted at BRL 979.85, down by only 0.25% compared to the previous Friday. On the other hand, due to demand by the Brazilian industry and the search for better values by producers, who are holding sales in search of better prices, the Cepea’s Robusta indicator ended the week high by 6.6%, closing at BRL 675.37/bag.

Concerning the 2023 crop, the outlook for a large crop has been based on adequate rainfall conditions in Brazil in recent weeks. The main Arabica and Robusta coffee-producing regions had accumulations of up to 350 mm in the last 60 days, with the forecast still pointing to accumulations of up to 200 mm from the coffee belt. Despite the positive outlook for Brazilian production, some players do not believe that the next crop can surpass the record observed in 2020. However, optimism should continue to weigh on prices until new estimates indicating a different scenario are released. 

For Robusta coffee, the scenario has been a little different. As mentioned before, in Brazil, Robusta prices remain strong amid strong demand from the industry. The appreciation of Robusta coffee in the Brazilian market supports the increase in price differentials and disfavors Robusta exports, which places Vietnam and Indonesia as the main suppliers of Robusta to the international market. In recent weeks, Robusta differentials have advanced again, exceeding USD 200/t last week, indicating that Cepea's Robusta indicator is USD 200 more expensive than London. Access here the interactive report with the differentials of coffee prices in Brazil.

Considering that Vietnam remains the main supplier for the international market, it is worth mentioning that the country's coffee production should be slightly lower this season, according to the USDA, but should still exceed 30 million bags. In 2022, the TET holiday, the lunar new year, will take place earlier than last year, starting on Jan. 22 and stopping activities for nine days, which reduces the buying window and has supported the movements observed in recent weeks. The harvest there started in mid-November and should continue until January. 

This week, prices should react to export data in Brazil by Cecafé, which will be released today (12). The prospect is that important export volumes will be reported for November, which should indicate how coffee's logistical situation and availability are in this crop year. In addition, prices should react to the stock data at US ports, which will be released on Thursday (15). 

On Dec. 12, the USDA will release its final report with the global supply and demand balance. The feeling is that the agency will revise the supply and demand balance, considering that in the last attaché reports, the agency had already reduced its outlook for Brazilian production in 2022/23. In addition, the report indicated a lower production in Colombia compared to the previous estimate. 

EL NIÑO/LA NIÑA PROBABILITY FORECAST

Source: IRI/CPC NOAA. Design: StoneX. 

The negotiations about the Transition PEC of the government that will take over the country in 2023 continue to be one of the main sources of volatility in the Brazilian exchange market. Last week, the PEC was approved in the Senate Plenary after adjustments and weeks of negotiation. As detailed in the FX Weekly report, the constitutional amendment does not remove the funding of the Auxílio Brasil income transfer program from the so-called spending cap but increases the constitutional spending limit for two years in the amount of BRL145 billion, a period and amount reduced in relation to the initial proposal (BRL 175 billion for four years). This week, market participants should follow the negotiations and possible changes to the PEC in the Chamber of Deputies, where the transition government faces more resistance and may have to make more concessions for the approval of the proposal.

Last Friday (9), the president-elect announced a series of definitions for his ministerial cadre, emphasizing the nomination of Fernando Haddad for the Ministry of Finance. The choice of Haddad causes an initial discomfort because he is a member of the PT and for being an appointment with a profile considered more political and not technical, being someone who, due to his proximity to the future president, may not impose great resistance on any proposals to expand public spending. 

A factor that may restore more confidence in investors is the definition of names considered more technical for the main secretaries within the Treasury, such as the Treasury Secretariat. The expectation is that part of the future minister's team will be announced on Tuesday (13), the same day scheduled for the nomination of other future president's government ministers, with special market attention paid to ministries closer to the economy, such as Planning.

Abroad, the agents should reflect the monetary policy decisions in the United States, the eurozone and England. In recent weeks, the USDBRL has been under pressure against other currencies as investors priced in a possible decline in inflation in the United States and statements from Fed members that the monetary authority would make smaller increases in its next decisions. For this Wednesday (14), most of the market bets are that the Fed will make a 0.50 p.p. hike, below the 0.75 p.p. increases made in recent decisions.

More than the decision, the market will follow both the speech and the statement after the decision, as well as the quarterly update of the Fed's projections for GDP, unemployment rate, inflation and interest rates in the country over the next few years. Currently, amid a mix of indicators suggesting a slowdown in the economy and inflation and indicators pointing to a still robust activity level, expectations for the Fed's decisions in 2023 are widely dispersed. The projections will help the market better orient its outlook based on what the Fed members have been observing for the American economy.

It is worth noting that on Tuesday (13), the Bureau of Labor Statistics (BLS) is expected to release November inflation data in the US, while Eurostat will release inflation in the eurozone on Friday (16). It will be important to observe how the prices of roasted and ground coffee to the consumer will evolve in the regions, which has accelerated in recent months and raised concerns about the consumption of the beverage.
 

12-month accumulated inflation of roasted and ground coffee for consumers

Source: BLS, Eurostat, IBGE. Design: StoneX.

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