Fundamentally, market sentiment remains bullish due to the sharp reduction in Brazilian production and weather-related problems. The sharp decline in Brazilian production in 2021/22 due to the negative biennial and dry weather in late 2020 and the first half of 2021 will result in a world supply and demand deficit for the 2021/22 season. Estimates for supply and demand balance in 2021/22 range from -2.6 million to -13 million bags.
In addition, the frost occurrence has affected the potential for the country's next coffee crop. Several organizations point to losses between 2 million and 10 million bags, while the market sentiment is that losses would be around 5 million bags. The Technical Assistance and Rural Extension Company of the State of Minas Gerais (Emater-MG) recently released its estimates for frost-related losses. According to the company, 19% of the coffee areas were affected, representing 173.7 thousand hectares, with a potential loss of 3.47 million bags.
Early last week, the weather models pointed to the return of rainfall at the beginning of September. However, updates show a different scenario. The StoneX weather report, which is based on data from the US National Oceanic and Atmospheric Administration (NOAA), through the GFS model, indicates that this rainfall should not materialize in the coming days. Despite this scenario, rainfall is expected to return in the producing regions in the second week of September. Still, it is important to note that these models can change, so daily monitoring is necessary. The rainfall return at this time would contribute to the recovery of the crops under water stress, besides promoting the flowering development. In addition, it is important to remember that the NOAA models point to a 70% probability of La Niña occurrence at the end of the second semester and the beginning of 2022, which could result in excess rainfall in Central America, Colombia and Asia, a factor that should also be monitored.
Source: StoneX, with NOAA/NCEP/EMC (GFS: Global Forecast System), 2021.
The coffee market has been reacting to the serious logistical problems resulting from the Covid-19 pandemic. In addition, a new outbreak has caused serious problems in Vietnam, the world's largest producer and exporter of Robusta coffee.
In the coming weeks, weather-related problems in Brazil, logistics struggles and the new Covid-19 outbreak in Vietnam will be in the agents' spotlight as these factors favor prices' bullish movement. In addition, it is worth paying special attention to export data from some countries to be released in the coming weeks, highlighting exports from Vietnam, Brazil and Colombia.
In addition, the market has been keeping an eye on the hurricane Ida landfall, as it hit the Louisiana coast on Sunday afternoon and was classified as a category 4 hurricane, i.e., with winds north of 210 km/h. At the time of writing this report, the hurricane category had been downgraded to level 3. For coffee, the biggest concern is the commodity's warehouses that are located on the US coast. According to GCA data, more than 350,000 bags of coffee are stored in New Orleans, Louisiana. In 2005, the warehouses at the New Orleans port were severely damaged by Hurricane Katrina.
CONTAINER SHORTAGE CONTINUES TO IMPACT COFFEE SUPPLY CHAIN
As the world grapples with continued outbreaks of COVID-19, new restrictions and lockdowns, the coffee market continues to face challenges with the availability of shipping containers, putting even more of a strain on the supply chain.
"Brazilian coffee is still in dispute to conquer space on ships and be shipped at the right time. The delays that have generated unprecedented operational struggles for exporters and, above all, a financial burden resulting from the lack of planned cash flow for this unimaginable scenario. It is worth remembering that this occurs simultaneously with a market reality in which prices reach the highest levels recorded in recent years and the harvest of the Brazilian crop is around 80%", said the president of Cecafé, Nicolas Rueda.
In Colombia, disruption of shipping containers are once again preventing Colombian coffee to reach its destination because some shipping companies are not docking on Colombian Pacific ports, prompting a delay of coffee exports. The disruption begun on August 20 when the shipping agency Hamburg Sud declined to dock on the Pacific port of TcBuen, one of the four terminals that host the city of Buenaventura. Other shipping companies, including MSC are not docking in Sociedad Portuaria de Buenaventura.
China is paying US$10,000-$15,000 in freight charges per container, while coffee exporters pay as much as US$2,500 per container, prompting shipping companies to prefer the customer that pays the most for the cargo, resulting in a shortage of container ships willing to take Colombian coffee to international markets from Buenaventura. A total of 47 vessels were cancelled or rescheduled in 2021 earlier this year while 171 containers were affected.
In Vietnam, coffee producers are struggling with tightening COVID-19 restrictions along with continued container shortages. Additionally, the Suez Canal blockage earlier this year disrupted ships being able to get back to China to resume their rotations, added to the shipping container shortage. This was compounded with an increase in containerized goods during the lockdown in the US as imports surged during stay at home orders were in place.
We have seen a consolidation of ocean carriers, which has led to a capacity reduction. Vessels are relatively small from South America to North America, the route of most of the world's coffee, and deploying larger vessels wasn't justified financially. Additionally, coffee containers are heavy, so consequently, carriers demanded a premium of 300-400% or more to make room for coffee.
Plus, maritime containers are manufactured in China, so when China is on lockdown, there are no containers. It is estimated that there are 51 available vessels in the whole world with no capacity available at this moment in time. While new vessels being built, it is expected that these won't become available until 2023-2024.
ROBUSTA COFFEE QUOTES HIT 4-YEAR HIGH IN LONDON
Moving into this week Robusta has made a strong start as through yesterday and today driven by the enforcement of further lockdown restrictions as cases of Covid continue to rise there. A strict lockdown has been enforced in Ho Chi Minh which is one of Vietnam's largest cities for coffee exports. Reports indicate that citizens are currently not allowed to leave their homes which of course will have implications for the supply chain at a time when flows of coffee out of Vietnam are already being delayed due to container shortages and tightness in supply ahead of the new season. So supply side fears are the real drivers behind the price rises through this week. Exports continue to run around 1.5M bags behind last year, and the certified stockpile has been in a steady downward trend since late May. Unfortunately Vietnamese customs data will not show any indication of the impact on exports for two to three weeks but a large drop off in shipments would obviously serve to provide further fuel to that fire. Until then price action around this story is likely to be driven by media reports.
The Central Highlands is forecast for moderate to heavy rainfall in the week ahead with temperatures averaging in the mid-twenties. Following on from a drop in vegetation density earlier in the month, recent rains have aided crop development. The good levels of rainfall in the week ahead should continue to promote crop development and provide hopefully suitable moisture reserves for the filling stage.
As of Thursday's settlement the most active November contract had gained 7.0% W/W, with the contract managing to break past $2,000/t for the first time in four years on Friday amid growing concern over the impact the lockdown in Ho Chi Minh will have on Vietnamese shipments. Prices in Dak Lak (Vietnam) were also affected, increasing 4.5% on the week. Reports indicate that exporters are struggling to move beans to the ports for shipment, compounding with the ongoing container shortage and high freight rates, as well as an overall tightness in supply as we approach the end of the season. The Vietnamese Coffee-Cocoa Association has petitioned for the Government to ease the restrictions, with the Transport Minister ordering authorities in the south of the country to aid the movement of agricultural products, including coffee.
ROBUSTA COFFEE QUOTES ON ICE LONDON VS. CEPEA INDICATOR
Source: ICE London, Cepea. Design: StoneX.
As if the increases in Robusta domestic prices were not enough due to the higher demand for the variety after frosts affected the Arabica coffee crops, the appreciations on the London stock exchange have also contributed to continuing renewing their historical highs weekly. Last week, the CEPEA Robusta indicator closed at BRL 683.65/bag, high by 4.8% compared to the previous Friday. With this, the prices in Brazil are heading to the end of August with an increase of over 17% from July, when the CEPEA indicator closed quoted at BRL 580.56/bag.
In this context, the Robusta coffee differentials between the domestic and the stock exchange prices, which have been negative constantly over the last few years, have been inverted since the beginning of the month, pointing to coffee being worth more in Brazilian markets than on the stock exchange. If they continue at these levels – which seems the case – the reflection of this effect tends to be observed in Brazilian Robusta exports as it should weaken in the coming months.
BRAZILIAN GDP AND US JOBS IN AUGUST SHOULD AFFECT THE FX MARKET THIS WEEK
Last week, the coffee appreciations in New York were favored by the dollar drop in the Brazilian exchange market. As a result, the real/dollar pair fell 3.3% to close Friday (27) quoted at BRL 5.196, the biggest weekly drop since May and interrupting a sequence of three consecutive weeks in appreciation. However, a relatively calmer domestic environment and the return of risk appetite abroad, with the dollar index retreating from its highest levels since November 2020 and the main US stock indexes renewing their historical highs, boosted the Brazilian currency recovery this week.
Federal Reserve Chairman Jerome Powell's speech at the Jackson Hole Symposium on Friday brought some relief to agents in the US. By not offering new details about the Fed's bond buying program reduction, Powell signaled that he was in no hurry to start the contractionary stance in the United States. Despite affirming that this should happen later this year, the Chairman indicated that caution is needed for this move, considering the uncertainties imposed by the advance of the new Covid-19 variant and the risks that a disorderly action could provoke in the recovery of the labor market. The statements that the tapering has no connection with a rise in interest rates, which should remain at the current level for some time, were also received positively by investors. Thus, the market must wait for the official employment situation report from the US Department of Labor Statistics (BLS) next Friday (3) to understand how the job recovery has been in the first month of the surge in Covid-19 cases in the country.
In Brazil, despite the BRL recovery, it is important to highlight a worsening in agents' perception regarding the main economic indicators. The market survey conducted by the Central Bank of Brazil's Focus Bulletin on Monday indicated a deterioration in expectations for the Brazilian GDP for the third week in a row. The median of the projections indicates that agents expect Brazil's GDP to grow by 5.22%, against 5.27% last week and 5.3% four weeks ago. On Wednesday (1), the Brazilian Institute of Geography and Statistics (IBGE) will release the result of the second-quarter GDP, which should be fundamental for the formation of the agents' expectations regarding the Brazilian economic recovery. Analysts' projections indicate that GDP should decrease from 1.2% in the first quarter to 0.2%.
The Focus Bulletin also increased inflation projections for the 21st consecutive week. The median of market projections indicates that the IPCA should end 2021 at 7.27%, against 7.11% last week and 6.79% four weeks ago. The result reflects last week's publication of the August IPCA forecast, which pointed to an acceleration in inflation, driven mainly by increases in the transport, food, household goods and housing sectors.
The signs that electricity will become more expensive again continue as a point of concern in this regard. According to media reports, the Brazilian Electricity Regulatory Agency (ANEEL) will soon make a new adjustment of up to 58% in the value of the red flag level 2, raising the amount charged for each 100kWh from BRL 9.49 to about BRL 14.00. ANEEL had already put into effect in July a 52% increase in the price of the red flag 2. The decision should be confirmed due to the worsening water crisis because of the continued reduction in the reservoirs of the hydroelectric plants in recent months. This increase may negatively affect economic activity, impacting the industry's production costs and further harming the population's purchasing power. It is worth mentioning that electric energy is the second heaviest sub-item in the IPCA index calculation (weight of 4.4%), following gasoline (weight of 5.1%).
