Coffee Weekly Report

Coffee prices advanced significantly in the last week on the main exchanges. As mentioned in the last report, a set of fundamentals, such as concern about the short-term global coffee supply and the next Brazilian crop, weather issues and technical factors, promoted a surge in coffee prices. 

The most active contract for Arabica coffee (March/22) showed a weekly appreciation of 1145 points (5.15%) on the New York exchange to end Friday (19) quoted at US₵ 233.4/lb, after reaching a US₵ 239.5/lb high, its highest level since January 2012. In Brazil, the CEPEA indicator for Arabica coffee recorded an increase of 6.5%, about BRL 84.8/bag to close Friday (19), quoted at BRL 1392.66/bag, a historical high for the index.

As already commented in other editions, the negative supply and demand balance in this crop year associated with the expectation of a lower production next year has supported coffee prices. In Brazil, the limited number of trades, with sellers waiting for the price advance to establish their sales in the spot market and fix sales in the futures market, has also contributed to the advance of prices, especially at the domestic level. In addition, there are global logistical problems and the impacts of La Niña on coffee production in Colombia, Central America and Asia –in a recent publication, Coffee Network reported that the largest producing region in India, Karnataka, has faced excessive rainfall volumes, which has generated concerns about production and plant diseases.

The market's bullish bias was also reflected through the result of the latest CFTC's Commitment of Traders (COT) report released on Friday. According to the report, spec funds increased their long positions by 4,013 in futures and options between November 9 and 16, reducing short positions by 2,023, bringing their net long balance to 46,585. Moreover, during the period, the most active contract price jumped from US₵ 208.65/lb to US₵ 224.5/lb (+7.6%).

Source: CFTC. Design: StoneX.

Earlier last week, the Green Coffee Association released October coffee stocks at US ports. According to the association, there were 5.97 million bags at US ports at the end of October, indicating a reduction of 46,816 bags compared to the previous month and 161,021 bags compared to the same month last year. Furthermore, volumes are below the 5-year average for the month, which is 6.5 million bags. Despite historically low levels, a sharper reduction in stocks was expected for the month, as consumption in the country recovers post-pandemic and logistical problems tend to hinder coffee imports. For a better understanding of this scenario, it is necessary to assess import levels into the US. However, import data for the month have not yet been released by the USDA or the US Department of Commerce, occurring in early December.

Source: NOAA. Design: StoneX.                                                                                       

Next week, the market will closely follow the release of the USDA Attaché reports for coffee production this crop year, which started to be released at the end of last week. Furthermore, the market continues to have a positive sentiment amidst a negative S&D balance and all the other factors mentioned above.

USDA Attache Reports Shed Light on Ongoing Logistical Problems

The USDA have begun to publish their coffee Attache report. The reports are published twice a year; the first in June and the final in December. Below is a chart of the revised production and export figures for the reports that have been released thus far. At the completion of the Attache reports, the USDA will publish their biannual World Coffee Report on December 17th.

One thing that is highlighted in the new reports is the decline in exports from the initial forecast. While Colombia and India’s export forecast remained unchanged, Brazil, Indonesia and Vietnam will see a combined decline of 26.6% compared to the June forecasts. The fall in exports is especially noteworthy amid the expectation of unchanged production in Brazil from the June estimate and higher production from Vietnam. This reaffirms the issues with logistics that have been observed globally and how this has impacted green coffee shipments.

Taking into account that the revised attache reports have already been published for the three largest coffee producers (Brazil, Vietnam and Colombia), it is possible that overall global coffee production could be revised slightly lower in December’s report. In June, the USDA pegged global production at 164.8 million bags. Exports will seemingly also be revised lower from the 136.3 million bags forecast in June.

Estimativas do usda para produção e exportação

Source: USDA. Design: StoneX.

Next month, we will publish a special report detailing all the main points of the USDA updates for production, exports and stocks in the main producing countries, along with an analysis of the final balance sheet.

 

ROBUSTA COFFEE PRICES RETREAT IN THE WEEK

The most active January contract in the Robusta complex fell by 1.4% over the course of the past week, amid a lack of fresh fundamental headlines to maintain an upward drive, a contrasting story to that of Arabica’s over the past week. Reports indicate that there is a level of easing concern of supply availability for Robusta, with fresh supplies from the Vietnamese harvest coupled with a backlog of coffee built up from the logistical issues that were present throughout the 20/21 marketing campaign. This now comes amid a decline in freight costs in recent weeks, as reflected by the Baltic Dry Index which continued its downward trajectory last week to settle the week 9.1% lower and at its lowest level since mid-June. The WCI Composite Container Freight Benchmark (40 foot) has also lost ground in recent weeks.

Easing freight rates are likely to encourage greater demand for Vietnamese supply with the declines in benchmarks a likely reflection of steadily improving availability. Meanwhile, trading activities in Vietnam are reported to be slow amid a slow developing crop on erratic weather conditions that are slowing the harvest. Some reports do suggest that Covid cases are causing issues in securing workers to pick the cherries, although others reject these reports stating that farms are having no issues in securing workers.

Robusta 2ndContinuation Candlestick

Source: ICE. Design: StoneX.

The USDA published its attaché report for Vietnam last week, estimating 21/22 production at 31.1M bags on improved weather conditions. The report also highlighted the potential for a late end to the rainy season, with precipitation between November and December expected to be around 5 to 25% higher than normal. Domestic consumption for 21/22 is forecast at 3.14M bags while exports are forecast at 25.8M bags for the new season. Ending stocks for 2020/21 were forecast at 3.81M bags with 21/22 carryover estimated at 6.58M bags.

The USDA also published the equivalent report for Indonesia last week with production for the new season estimated at 10.58M bags due to lower Arabica yields in northern Sumatra and lower Robusta yields in the southern Sumatra. Domestic consumptions for the new season is estimated at 4.75M bags, up 300,000 Y/Y. Exports for the new season are estimated at 5.9M bags, down 9% Y/Y.

Domestic prices in Dak Lak also declined marginally over the course of the past week (down 1.9%), hovering around $1,790/t marking an approximate discount of $480/t against the London 2nd continuation.

Robusta 1stContinuation vs Dak Lak Price

Source: Giacaphe, Bloomberg. Design: StoneX.

USDBRL appreciates amid fiscal concerns and following the foreign scenario
After retreating for three consecutive weeks, the USDBRL appreciated last week in the Brazilian foreign exchange market, reflecting agents' concerns about the government's fiscal responsibility and the advance of the USD currency abroad, as expectations that further monetary contraction may occur earlier than expected in the United States grow. As a result, the real/dollar pair closed last Friday (19) quoted at BRL 5.610, a weekly increase of 2.8%, while the dollar index ended the period at 96.1 points, high by 1.0%, reaching its highest levels since July 2020.

Investors' risk premiums due to fiscal insecurity rose again last week, as debates in the Federal Senate over adjustments to the proposed constitutional amendment (PEC) of judiciary bonds, raising concerns that the PEC may have its approval delayed or significantly modified. The proposal, approved by the Chamber of Deputies, opens BRL 91.6 billion in the 2022 Budget and needs to be approved in the Senate in two rounds. The apprehension of the agents is due to uncertainties about what may be changed in the proposal by senators and the fear that the changes may further increase the country's fiscal imbalance, which tends to push the USDBRL higher. Nevertheless, the proposal is scheduled to be examined by the Senate Commission on Constitution, Justice and Citizenship (CCJC) on Wednesday (24). If approved without significant changes, it may bring some relief to the Brazilian real.

President Jair Bolsonaro's promises that with the PEC approval, the government will carry out a salary readjustment for all public servants also caused insecurity in the foreign exchange market. The amount needed for such an adjustment, not initially foreseen in the Ministry of Economy calculations due to its permanent character, would require an indication of revenue or expenditure cuts to be financed under the Fiscal Responsibility Law, factors that the president never indicated. Furthermore, the federal government's push for new spending without planning or adjusting expenditures on the eve of an election year raises concerns about a further deterioration in public accounts.

In the foreign scenario, expectations that monetary contraction may occur soon, as global inflation indicators continue to accelerate, grew during the week. As logistical bottlenecks and limited inventories do not allow for relief in the price level of goods, the performances of the sectors of the economy and the labor market advance, especially in the United States, indicating prospects that demand will remain heated. Such an imbalance in the global supply and demand balance may force central banks to take firmer measures to control prices, which contributes to greater demand for the American currency. 

This week should be less busy in the international market due to the Thanksgiving holiday in the United States on Thursday (25). However, as a highlight, investors should follow the release of the revision of the American GDP for the 3rd quarter by the Bureau of Economic Analysis (BEA) on Wednesday (24) and the minutes of the latest decision of the Federal Reserve's Monetary Policy Committee (FOMC). In addition, the market should look for new information in the minutes about how the committee members discussed reducing the asset purchase program and the rise in the basic interest rate next year.