Coffee Weekly Report

Amid the uncertainties regarding the Brazilian production in 2022/23, in expectation of the release of estimates for the crop, and associated with technical factors, the Arabica market ended the week with an important increase of 1235 points (5.46%), closing at US₵ 238.45 last Friday (07). In the Brazilian spot market, the advance observed in coffee prices was less intense; the CEPEA indicator for the Arabica variety showed that coffee prices increased 4.34% in the week, closing Friday (07) quoted at BRL 1,493.73/bag, a new historical high. On the other hand, the Robusta prices dropped by 2.27% in London, closing at USD 2,316/ton. On the other hand, the Robusta Brazilian market remained almost unchanged, closing the week at BRL 828.00/bag.

As already mentioned in other editions, the market is still waiting for estimates for Brazil's 2022/23 crop. Conab announced that it would release its estimates on January 18. In addition to Conab, several private organizations are expected to release their estimates in the coming weeks. StoneX will release its estimates for Brazilian 2022/23 production in the first half of February. 

In Brazil, excessive rainfall has caused problems in some regions. A few weeks ago, the Southern region of Bahia, an important Robusta producer, suffered from excessive rainfall and flooding. More recently, the state of Minas Gerais has been punished by high rainfall volumes, with several places showing landslides and mudslides. Some affected areas near the state capital Belo Horizonte are not important in coffee production. Still, other important coffee-producing regions, such as Matas de Minas, have suffered from excessive rainfall, with landslides and impacts on some crops. For the coming week, the models indicate volumes of up to 100 mm of rainfall in some regions in the state of Minas Gerais. 
 

Source: StoneX, with data from NOAA/NCEP/EMC (GFS: Global Forecast System), 2021.

Over the next two weeks, the coffee market will be keeping an eye on Brazil’s export data, which should continue to indicate the impact of the logistics crisis on Brazilian exports, and stock at US ports figures by the Green Coffee Association, which will be released on Monday (17). In Brazil, preliminary export data already pointed to a strong decline in December. According to Secex, coffee exports totaled 3.4 million bags in December and were 18.4% lower than the previous year.

Certified Stocks Continue to Decline

The latest data from the InterContinental Exchange showed that as of January 7th, certified stocks were 1.5 million bags. This is down 6.25% from the 1.6 million bags registered just 30 days prior. This sharp decline in such a short amount of time has triggered concerns that stocks could fall to 1 million bags or below this year. The last time stocks were that low was when they reached 1.096 million bags in October of 2020.

Last year, the market saw an unprecedented increase in certified stocks from Brazil, attributed to a falling differential, making it very profitable for producers to deliver their coffee to the Exchange.

Source: ICE/NY. Design: StoneX.

If differentials are weak compared to New York exchange price, meaning if there is a devaluation of coffee in a particular region, it makes sense for the exporter to buy coffee and deliver it to the exchange to certify. However, when differentials are stronger, a producer makes more money to sell the coffee FOB instead of delivering the coffee to the exchange.

Brazilian certified stocks have fall nearly 3% since the start of the year, from 699,087 bags on the first trading day of January 3rd to 678,847 bags as of January 7th.

Honduran coffee, which generally makes up the majority of certified stocks, have also fallen 1.4% since the start of the year, from 731,026 bags to 720,999 bags.

The USDBRL ended the first week of 2022 higher, closing last Friday (7) with an appreciation of 1.0%, at BRL 5.632. The foreign exchange market followed the sentiment of increased fiscal risks in the country, with the movements of some categories of public employees to pressure the federal government for salary adjustments in 2022. The real/dollar pair's movement also followed the US currency's appreciation abroad, where agents reflected the US monetary authority more contractionary stance revealed in the minutes from the Federal Open Market Committee's (FOMC) meeting and the December labor market data for the United States. The dollar index remained above 96 points during most of the week, retreating on Friday to close the period with a weekly increase of 0.2%, quoted at 95.7 points.

The expectation that interest rates in the US will be increased earlier than expected has contributed to boosting demand for the American currency. The minutes of the last meeting held by the Federal Reserve's FOMC indicated concern with stronger and more persistent inflation than forecast by its members, indicating a consensus among its participants that it may be necessary to raise the basic interest rate faster than previously forecast. In addition, members discussed the possibility of reducing the Fed's allocation of federal debt and mortgage-backed securities on its balance sheet. 

The prospect of lower dollar liquidity in the market and higher interest rates in the country increases the attractiveness of investors to dollar-denominated securities. However, this movement tends to drive away investments in riskier markets, such as Brazil, which tends to act negatively for the Brazilian real. In addition, the commodities complex in general, also considered a riskier investment, tends to be pressured in this context.

The labor market data in the United States contributed to reducing the highs of the American currency at the end of the week.

According to the Bureau of Labor Statistics (BLS), the balance between hirings and firings in December showed 199 thousand new jobs were created, less than half of the analysts' expectations, who expected 422 thousand new jobs would be created. The reduction in the pace of new job creation for the second consecutive month eases the pressure for an acceleration in the reduction of monetary stimulus to the economy. However, despite the lower than expected number, the unemployment rate dropped from 4.2% in November to 3.9% in December.

In Brazil, the mobilization of several civil service classes demanding salary adjustments in 2022 should remain in the agents' spotlight. The movement comes after President Jair Bolsonaro requested the inclusion of BRL 1.7 billion to promote readjustments only for federal security categories, such as the Federal Police, the Federal Highway Police, and the National Penitentiary Department. The possibility that the government will give in to pressure from the working classes, and have to make new changes in the 2022 Budget, tends to raise the country's fiscal risks, which should remain on investors' radar. 

Moreover, this week, the agents should reflect the results of the US Consumer Price Index (CPI) and the Producer Price Index (PPI) for December, which will be released on Wednesday (12) and Thursday (13) respectively, by the BLS.

In Brazil, the IBGE will release the National Broad Consumer Price Index (IPCA) for December on Tuesday. Until November, the IPCA had accumulated a 10.74% increase in 2021, significantly above the upper limit of the target proposed by the Central Bank of Brazil (5.25%), with the prices of ground coffee accumulating a 38.8% increase for the Brazilian consumer. In addition, IBGE will also publish the Monthly Survey of Services (PMS) and the Monthly Survey of Trade (PMC) for November.