Coffee Weekly Report

In a week of high volatility, Arabica prices recorded their second consecutive weekly advance on the ICE in New York. Amid concerns about Brazilian and Colombian production and the drop in certified stocks, the most active contract (Mar/22) closed quoted at US₵ 239.65/lb, an increase of 120 points (0.5%) compared to the previous Friday (7). Throughout the week, agents again tested the US₵ 240/lb resistance when prices reached highs at US₵ 244.4 on Wednesday (12), a session in which they ended at US₵ 240.85, the highest close since December 8. In Brazil, the CEPEA indicator for Arabica coffee renewed its highs on Wednesday, exceeding the BRL 1500 level to end the session at BRL 1502.91/bag. However, it dropped to end Friday at BRL 1498.14/bag, a weekly appreciation of only 0.3%.

On the other hand, Robusta fell for the second consecutive week, with prices pressured by signs of increased availability of coffee in Vietnam, with the harvest nearing its end and the Lunar New Year approaching in the country, and by technical signs of long positions selloff by funds, after reaching historical highs in the week ended January 4.
The most active Robusta contract (March/22) retreated USD -88 (-3.8%) to close the week quoted at USD 2228/ton, its lowest since late November. The Cepea Robusta indicator ended the week at BRL 827.92/bag, practically stable.
Indications of a successful harvest in Vietnam, despite difficulties with rainfall, a lack of workers at times, and an increase in supplies over the last two weeks, have contributed to pressure on Robusta prices. In the first month of the year, exports in Vietnam tend to intensify, as Vietnamese producers and trade, in general, try to increase their earnings for the Lunar New Year (Tet), the most important holiday of the year for the country, which will take place in early February. Thus, the increase in supply, without the counterpart of a similar increase in demand for Robusta coffee from the country's main trading partners, has been one of the factors putting pressure on prices in recent weeks.
The Arabica market is still waiting for new information about the Brazilian production and following the weather in the country's producing regions. Despite the consensus that the 2022/23 season will not present the expected yield potential due to the various weather events that damaged crops last year, the weather in early 2022 remains a key factor in mitigating crop losses. Adequate precipitation volumes in the first months of the year, when plants are in the fruit formation period, would ensure good productivity of crops little damaged by dry weather and frost, reducing the potential for production drop.
The StoneX weather forecast model points to volumes of around 50mm to 90mm over the next seven days in the southern Minas, Cerrado and Mogiana regions, with projections of more intense rainfall at the end of the week. The prospect is that the volumes will intensify in the last week of the month in all Arabica producing regions.

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

The market expects new estimates in the first months of 2022 to bring new information about crop conditions, which should help agents "rebalance" their expectations. At present, it is already possible to ascertain the crops that have succeeded in the stages of setting and expansion, which helps to assist the accuracy of the estimates. On Tuesday (18), Conab will release the first version of its estimates for the Brazilian 2022/23 crop. StoneX's Brazil coffee team is currently conducting a field study, where it will go through all the country's main coffee-producing regions. The special Crop Tour report will be released in the first half of February, together with StoneX's official estimates for the next season.
This Monday (17), Brazilian export data for December will be released by the Brazilian Coffee Exporters Council (Cecafé). Preliminary export figures have already pointed to a decline in December – according to Secex, coffee exports in December totaled 3.4 million bags and were 18.4% lower than in December of the previous year. Besides Cecafé's official figures, it will be important to follow how the Council has observed the evolution of logistical problems that have hindered shipments in recent months and expect some improvement in the coming months.
Colombia’s yield could also be lower than expected in 2021/22. This is because the impacts of La Niña for two consecutive years in a key period of the country's main crop have negatively impacted production.

Source: FNC. Design: StoneX.

Continued concerns over the two main global Arabica producers tend to support prices at the higher levels seen last year.

Certified stocks continue to decline 

The drop in certified stocks also continues to be a factor of concern for the coffee market in general and has contributed to boosting prices in recent sessions. Last week, the ICE NY recorded a reduction of 97,466 bags in its certified stocks, a drop of about 6.5%. Since the beginning of the year, losses have accumulated to over 132,000 bags or a variation of -8.6%. With the variation and approximately 1.409 million bags, stocks have reached their lowest level in just over a year, already below the lows recorded in 2021.

Source: ICE/NY. Design: StoneX.

The current problem the world faces with logistical bottlenecks affecting a large part of global trade, with low stocks, lack of ships and containers hindering the flow of various goods, seems to be far from completely solved. For coffee, the lack of ships and containers and congestion at ports continues to be a major problem for both exporters and major consumers. The travel time from loading to unloading in the United States, for example, went from weeks to months, which has compromised the short-term availability of coffee for the industry in the main global consumer and other producing regions.
Thus, some agents continue to opt to receive ICE-certified stocks as an alternative to supply problems in the short term. Among the stocks that have been withdrawn, it can be noted that the withdrawal of coffee from Honduras has been slower, while the withdrawal of Brazilian coffee has been more intense.
As we commented in the last coffee weekly report, the increase in Brazilian stock certification has occurred due to a narrowing of differentials, making it very profitable for producers to deliver their coffee to the exchange for a period. 
If the differentials weaken compared to the New York market price, that is, if there is a devaluation of coffee in a given region, it makes sense for the exporter to buy the product and deliver it to the exchange to certify it. However, when differentials are stronger, the producer gains more by selling coffee FOB rather than delivering it to the exchange.
Currently, the differentials in the main Brazilian markets remain at relatively attractive levels, ranging between US₵-30/lb and US₵-40/lb, significantly low levels compared to the last 3-year average. However, the reduced coffee supply of the quality standards required by the exchange, the sharp increase in freight costs and the difficulties in delivering coffee to the exchange's warehouses in the required time have discouraged the certification of new Brazilian coffee by the exchange.
 

CERTIFIED STOCKS on the ICE NY NY BY COUNTRY 

Source: ICE/NY. Design: StoneX.

Since mid-December, Honduras has overtaken Brazil, and its coffees have regained the largest share in ICE warehouses. However, the current scenario of high FOB prices and logistical problems indicates a trend that coffee of Brazilian origin will continue to decline in the coming weeks and that there will be few deliveries of coffee from Brazil, with the prospect that beans from Honduras will once again dominate as the largest share in ICE warehouses. 

Last week, the IBGE released the National Broad Consumer Price Index (IPCA) for December, which showed an increase of 0.73% last month. Thus, the index ended 2021 with an increase of 10.06%, the highest indicator since 2015, when it registered an advance of 10.67%. The recovery in demand, production bottlenecks and high logistics costs, the water and energy crisis, the increase in commodity prices, and the devaluation of the Brazilian real were among the main factors that contributed to the price index closing almost twice the upper limit of the Central Bank's inflation target of 5.25%.
Among the two coffee items that make up the IPCA, soluble coffee's price increase slowed down, rising 1.26% in December, after having advanced 2.33% and 3.57% in October and November, respectively, ending the year with an accumulated 12.77%, relatively close to the index. Roasted and ground coffee, on the other hand, registered an 8.24% variation in its price last month, beating August (7.51%), which had registered the highest monthly increase of the year until then. As a result, roasted and ground coffee accumulated 38.81% in November to end the year with a significant increase of 50.24%. It is worth considering that the 50.24% growth is an average among all products and all locations surveyed, with some locations registering even more intense increases than the general index. Among the highlights of the locations surveyed by the IBGE, the Greater Vitória region, in the state of Espírito Santo, indicated the highest rise, accumulating 65.15% in the year.

Source: IBGE. Design: StoneX.

The chart below shows that most of the increases began to occur with greater intensity from the second half of the year, specifically in August. Until July, while the Arabica domestic prices accumulated about 67% and Robusta 41%, the values on the shelves, according to IBGE data, accumulated an appreciation of only 9.5%. However, after the frost events at the end of July, which encouraged strong advances both for Arabica and Robusta coffees, roasters, which had already been working for some months with lower profit margins since the beginning of the year, started to pass on their higher costs to supermarkets and, ultimately, to the final consumer.
Amid this scenario, a concerning factor is a possible reduction in consumption in the domestic market, which could lead prices to a downward trend since Brazil is the second-largest global consumer. It is expected that before a significant demand reduction, Brazilian consumers should opt to replace their consumption patterns with cheaper coffee alternatives, for example, since coffee consumption in the country is very intrinsic to Brazilian culture and has a low correlation with changes in price and income levels. However, this remains a point of attention for the next consumption level surveys in the country.
On the other hand, a doubt remains to what extent these transfers will occur. At first, the expectation is that in 2022 inflation in the country as a whole will be able to be more controlled compared to 2021, since the Central Bank has already used several tools to contain the strong acceleration in prices, such as the subsequent hikes in the Selic basic interest rate, which should continue to occur in the first meetings of the Monetary Policy Committee (Copom) this year. However, considering that part of the rise in domestic coffee prices was due to factors specifically linked to weather impacts on coffee crops, the trend is that price pass-throughs will continue to occur with some intensity, at least in the first months of 2022.