Coffee Weekly Report

Last week, Arabica futures appreciated by 195 points (1%), closing on Friday (24), quoted at US₵187.70/lb. In the same period, Robusta futures advanced by USD 53/t (2.5%) to USD 2,151/t. The last week had its activities reduced due to the "Presidents' Day" holiday in the US on Monday (20) and the Carnival holiday in Brazil on Tuesday (21). Coffee futures advanced in the wake of projections for Brazilian production in 2023, whose first estimates have pointed to lower production than the market had anticipated. In addition, speculators in short covering and technical corrections movements influenced coffee futures prices.  

Weekly Intraday (most active contract) - Feb 20 to 24

In Brazil, Arabica coffee prices advanced on Wednesday (22) but retreated and ended the week in decline. The CEPEA indicator for Arabica coffee ended the week with losses of 1.4%, quoted at BRL 1141.39/bag. Despite the retreat at the end of the week, Robusta coffee prices ended with gains of 0,7%, with the CEPEA indicator closing Friday's session (24) at BRL 698.93/bag. 

On the fundamentals side, agents will be watching the export data of the countries, which should be released in the next two weeks, with great emphasis on Brazilian exports, which showed a strong decline in January. As mentioned in another edition of this report, demand indicators are beginning to take center stage despite uncertainties. On March 8, the USDA will release its report on US coffee imports in January.  

CFTC/COT report update: as noted by the CFTC itself, the release of the report with the commitment of traders has been postponed due to a cyber incident. Last week, the data regarding the movements of agents for the Robusta coffee market were released and are now up to date. In contrast, the data for the Arabica coffee market at ICE in New York are still delayed, with the last data available for 01/31. Access the latest CFTC/COT data via the interactive dashboard. 

Despite the favorable weather in much of the coffee belt in Brazil, with volumes above the historical average in the coffee-producing regions of Southern Espírito Santo, Minas Gerais, São Paulo, Paraná, and Rondônia, the Northern Espírito Santo and far South of Bahia has faced a period of reduced rainfall. As can be seen from the anomaly map, the accumulated rainfall over the last 30 days is at or slightly below the 30-year average for the region. The forecast for the next two weeks points to accumulations of up to 50 mm in these regions, with the return of rains in the second week. 

Despite the slightly below-average accumulation in part of these two regions, it is worth mentioning that both rely on the wide use of irrigation systems, with more than 90% of productive areas in Espírito Santo, for example, relying on irrigation systems. Therefore, an important indicator in this context is the volume of water in the reservoirs, which to date, follows without major problems. Accordingly, a long period of drought is necessary for the water reservoirs to run out.
 

Rainfall anomaly in the last 30 days in Brazil

Source: StoneX, with data from NOAA / NCEP / EMC (GFS: Global Forecast System), 2023.

A key point in the long term is the possible impact of El Niño on the region – the latest El Niño/La Niña probability report from NOAA indicated a probability of around 60% in the year's second half. Between 2014 and 2016, a long drought associated with a strong El Niño caused the reduction in the water reservoirs of Espírito Santo and Bahia to an alarming level, which made crop irrigation unfeasible and directly affected Robusta production. USDA estimates show Brazilian Robusta production fell 38% between 2014/15 and 2016/17, from 17 million to 10.5 million bags. 

El Niño/La Niña Probability Forecast

Source: IRI/CPC NOAA. Design: StoneX.

It is worth mentioning that, even in a scenario of strong El Niño and a long drought period, the impact level could be different from that observed in 2014-2016, given that there were significant advances in the productive system in Espírito Santo and South of Bahia, mainly from the implementation of new irrigation systems and replacement of old systems with more efficient ones. Moreover, after the reported episode, new water reservoirs and dams were built, even with the support of the local government, which substantially increased the water storage capacity in the region.

Since the end of last week, investors have weighed in on discussions about the re-imposition of federal taxes on gasoline and hydrous ethanol. Last year, through a provisional measure, the government promoted an exemption from fuel taxes, which will end on Tuesday (28). The dispute is between the internal wings of the federal government, in which the Ministry of Finance defends the resumption of taxes while other authorities defend their extension until April. On the one hand, the immediate return of taxes would guarantee, according to the calculations of the Treasury, a collection of BRL 28.9 billion per month, which would tend to contribute to the fiscal sustainability of Public Accounts. On the other hand, there is the fear that an abrupt resumption of these taxes could trigger a sharp acceleration of inflation through a cascade effect. The subject should be a source of volatility in the Brazilian foreign exchange market this week.

This week, the highlight for the indicator agenda is the industry and services PMIs for the United States, Europe and China. The data will reveal how the pace of activity expansion in the world's main economies has been and should contribute to the reading of agents regarding the outlook for demand. On the other hand, the results for the United States will add to expectations about the next steps of the Federal Reserve's monetary policy, with the potential downside for commodities in case of higher-than-expected numbers. Currently, 75.3% of the agents bet on a 0.25 p.p. increase in the next Fed meeting on March 22, while 27% believe in a 0.50 p.p. increase, a view that has been gaining more strength throughout the month and acts in a bullish manner for the American currency.

As for this week's economic indicators in Brazil, the highlight is the disclosure by IBGE of the Q4 2022 Gross Domestic Product (GDP) and consolidated, which should be reflected by the market.
 

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