Coffee Weekly Report

 

Last week, Arabica coffee prices dropped by 495 points (-2.28%) from the previous Friday (3), with the most active contract (December) ending the period at US₵ 188.05/lb. The rainfall forecast and the beginning of the Robusta flowering period weighed on coffee prices during the week. The latest International Coffee Organization (ICO) report, which pointed to a reduction in coffee consumption, also affected prices. The subject is covered in a separate section. Furthermore, coffee prices reacted to the rising dollar, as will be discussed below.

Market sentiment remains bullish due to the negative balance in 2021/22, logistical problems, and weather factors from a fundamental perspective. As commented in the last report, it is a consensus that the S&D balance will be negative in 2021/22 – estimates for the supply and demand balance range from -2.6 million to -13 million bags. In addition, several countries are facing problems exporting coffee, such as Peru, Colombia, Brazil, Vietnam and Indonesia. Unfortunately, there is no expectation of a solution to these problems in the short term. 

Regarding the weather, some producing regions in Brazil received substantial rainfall, such as Matas de Minas, Sao Paulo, Parana, Espírito Santo, Bahia and Rondônia regions. Some municipalities in the southern region of Minas Gerais, the largest national producer, recorded between 30 and 60 mm in the last 60 days. However, the volume is still below the historical average, especially in the northern part of the region, which can be seen on the rainfall anomaly map. The Cerrado region continues with volumes well below the historical average, with accumulations between 5 and 20 mm in the last 60 days. The rainfall observed in Matas de Minas, and the south of the state of Espírito Santo was enough to start the flowering process of the crops, and these volumes are closer to the historical average. The northern region of Espírito Santo did not receive good rainfall volumes, but the observed volumes associated with irrigation contributed to the beginning of Robusta flowering in the state. In addition, the latest GFS model has pointed to mostly dry and hot weather over the coffee belt in Brazil in the next 14 days. 

In Colombia, excessive rainfall has caused problems. There have been reports that the rainfall has destroyed roads and led to production problems in the country. The situation in Colombia could get even worse, as NOAA's models have increased the chance of a La Niña to 70-80% at the end of this year and the beginning of next year. The La Niña occurrence between December and February is associated with an increase in rainfall in Colombia, Central America and Asia, which can generate logistical, production and quality problems. It is important to note that Colombia is harvesting its main crop starting in September. In addition, starting in mid-November, Central American countries and Vietnam will begin their harvest period. 

As covered in other editions of this report, logistical problems caused by the Covid-19 pandemic led to delays in coffee shipments in several producing countries. In Brazil, preliminary export data, released by Secex, pointed to a 10% reduction in exports in August. The Coffee Exporters Council (Cecafé) data has not been released yet but should be in line with the trend indicated by Secex. There is no official calendar, but Cecafe's data should be released early this week. 

The Green Coffee Association (GCA) report should also be released this week, bringing data on the volume of coffee stocks at American ports. The GCA stocks report is an important indicator of the US domestic coffee market. For example, the latest GCA report showed a 5% increase in stocks between June and July, but the volume seen in July was still 13.9% lower than in July of the previous year. 
In Brazil, the CEPEA indicator for the Arabica fell 0.68% to end the week quoted at BRL 1,073.90/bag. On the other hand, the CEPEA indicator for Robusta pointed to an increase of 1.57%, ending at BRL 735.73/bag. 

The Arabica of inferior quality advanced compared to Arabica coffee with finer standards. According to StoneX Brazil's risk management consultant, Raphael Morais, exporters and trading companies are less active in the spot market, focusing on receiving future coffees due to logistical problems, which have hindered exports and trade in the international market. On the other hand, more intense activity has been noted in the domestic industry amid a sharp reduction in coffee supply and rising prices. 

The strong demand from the industry for the lower-quality Arabica coffees and the Robusta variety has supported prices in the domestic market and contributed to the price difference decrease between the lower- and the higher-quality Arabica coffee. Raphael recalls that during the same period last year, the LG 600 1x1 coffee (600 defects, with 1% impurity and 1% undertone) was traded at around BRL 350.00/bag, while the type 6 coffee was seen at around BRL 600.00/bag, with the difference between the standards at around BRL 250.00/bag (-41.6%). In the last few days, the same pattern, LG 600 1x1, traded at BRL 950.00/bag, while type 6 was seen around BRL 1,080/bag, pointing to a difference of only BRL 130.00/bag (-12%). 

The latest Commitment of Traders (COT) report, released by the CFTC, informed that between September 31 and September 7, spec funds increased their long positions in futures and options to 52,419 from 49,839 the previous week, a net increase of 2,691 in their long positions to 36,511. An increase like this usually tends to act in a bullish manner for prices. However, during the period, the most active contract in New York retreated 195 points, closing September 7 at US₵ 193.95. The index funds contributed to this movement, as it does not necessarily follow the coffee market trends. As a result, index funds reduced their long positions by 3,514 and short positions by 782 contracts, reducing their net long position by 2,732 contracts to 58,570.

 

As we approach the end of the October 2020 to September 2021 coffee year, final assessments of the global balance sheet are being made. Typical for the coffee market, forecasts for production and consumption vary but the a consensus view is that the coffee year will end with a supply surplus as an on-year crop from Brazil and good yields from many of the other producers surpasses a stagnant demand impacted by the global COVID-19 pandemic.

Most recently, the International Coffee Organization (ICO) issued their August coffee market report, revising both their production and consumption forecasts for the period.

For production, the ICO slightly raised their estimate by 0.02% from 169.604 million bags forecast last month to 169.644 million bags. Consumption was revised lower by 0.3% from 167.584 million bags to 167.011 million bags. Overall, the 2020-2021 coffee year is now expected to end with a 2.633 million bags.

“The supply/demand ratio is expected to tighten, as total supply is forecast to be only 1.6% higher than demand in coffee year 2020/21, as compared to 3.1% in 2019/20. With the expected substantial reduction in output from Brazil as a result of the recent frost and climate-related issues in many other exporting countries, total supply is expected to fall below world consumption,” the ICO noted in their report.

This is by far the lowest forecast for a surplus in the industry, with CoffeeNetwork estimating a surplus between 11 and 12.8 million bags, the USDA forecasting a surplus of 12.66 million bags and various other firms seeing a surplus ranging from 4.5 to 10.5 million bags.

While the ICO’s consumption figure is in-line with other forecasts, their estimate for production is significantly lower. Wide-ranging forecasts stem from many issues in the coffee sector, including the lack of transparency and the consequent challenges in accurate reporting of production. To maintain data consistency, the ICO converts production data from a crop year basis to a marketing year basis depending on the harvest months for each country, which could account for some discrepancies in their forecasts versus others. 

Looking ahead, focus will begin to shift to the global 2021-2022 crop year, with the earliest estimates already expecting a shift to a global supply deficit. While the ICO did not provide forecasts for this period, they did note “a substantial reduction of world production is expected in coffee year 2021/22 as some important origins have been affected by climate-related shocks.”

A volatile week for the Robusta complex, with the most active November contract settling 0.5% lower W/W overall despite rises to the highest levels for the Robusta complex since August 2017 with the contract testing a high of $2,130/t. The fundamental picture that has driven the market higher in recent weeks remained firmly in place as we started out last week, helping to push the complex to those multi-year highs. Container shortages in Asia coupled with fears over the strict lockdowns in Vietnam helped raise the London complex to its current multi-year highs, although, reports would suggest that despite the ongoing lockdowns, impacts on trade flows are reported to be minimal due to the dwindling stockpile that has limited fresh sales in recent weeks.

In a week of great volatility in the Brazilian exchange market, the real/dollar pair ended the week quoted at BRL 5.265, an increase of 1.4% from the previous Friday. On the other hand, the US currency tested BRL 5.32 between Tuesday and Wednesday, contributing to the sharpest daily drops of coffee in New York this week. The domestic situation figured as the main factor influencing the oscillations in the exchange rate, emphasizing the release of the August Broad National Consumer Price Index (IPCA) and the political repercussions of protests during the Independence Day of Brazil.

According to the IBGE, the Broad Consumer Price Index (IPCA) showed an increase of 0.87% in August, above analysts' expectations and the highest inflation for the month in 21 years. In addition, the IPCA accumulated an increase of 5.67% year-to-date and an increase of 9.68% in the last 12 months, the highest level since February 2016 and significantly above the upper limit of the Central Bank of Brazil's target at 5.25% for 2021. The increase in fuel, food and electricity prices contributed to important participation in the result.

In this context, the increase in roasted and ground coffee prices stands out, with a 7.5% increase in prices on Brazilian consumer shelves. The increase reflects the various price adjustments promoted by most of the major roasters in the country in recent months due to the high bean prices, which have started to be passed on more significantly to the final consumer.

With the strong increase of the IPCA, some agents have raised their expectations that the Central Bank's Monetary Policy Committee (Copom) may raise the Selic rate even further in the coming meetings. It is worth noting that increases in the Selic tend to be bullish for the BRL in the short term. However, the troubled political environment and the country's fiscal risks have prevented a sustained recovery of the Brazilian currency, as was observed after the latest increases in the basic interest rate.

The political scenario contributed to the USDBRL volatility last week after President Jair Bolsonaro continued to attack the Judiciary and ministers of the Supreme Court (STF) during protests in favor of his government. In addition, he threatened not to obey certain decisions coming from the Judiciary, which would lead to a crime of responsibility.

The president's speeches have again raised the tension in Brasilia and promoted party movements, with new parties positioning themselves against the government and starting discussions about possible impeachment, adding a new element of uncertainty among investors.

The increase in Bolsonaro's political isolation may also jeopardize the approval in Congress of important measures for the government, such as the income tax reform and the proposed constitutional amendment (PEC) that seeks to extend the payments of debt with the judiciary bonds. The PEC of judiciary bonds is considered essential to make room in the 2022 budget to accommodate the Auxílio Brasil program, which will replace Bolsa Família's basic income program. However, the articulations to find some legal solution for the approval of the PEC of judiciary bonds had been having the minister-president of the STF Luiz Fux's participation through the National Council of Justice (CNJ) may have been harmed by Bolsonaro's speeches. 

This week, the continuity of the unfolding events of the Independence Day of Brazil will remain in the agents' spotlight. Consequently, it should be a source of volatility for the foreign exchange market.

Furthermore, although the letter published by President Bolsonaro last Thursday (9), in which he tries to withdraw his attacks on the members of the STF and the institutions, has brought some relief to market's sentiment, the unpredictable history of the president's actions contributes for the agents to maintain a position of apprehension. In addition, the government's ability to move forward with its reform plan should also be analyzed by investors.

Among the highlights in the foreign scenario, after the release of an above-expected inflation rate to the US producer, the market should maintain some caution while awaiting the publication of the Consumer Price Index (CPI) on Tuesday (14), which will be important for expectations about the next movements in the Fed's monetary policy.