Coffee Weekly Report

A drop in the USDBRL, a decrease in certified stocks and a restriction in the supply of coffee contributed to coffee futures prices ending the week higher. The most active contract (Mar/22) closed quoted at US₵ 241.85/lb, a retreat of 595 points (2.52%) from the previous Friday (28). In Brazil, the CEPEA indicator for Arabica coffee followed the movement in New York but advanced only 0.67% in the week to end the session quoted at BRL 1481.20/bag.

Reversing the downward trend that had started in January, the Robusta coffee market showed an important advance during the week, reflecting lower activity in Vietnam due to the Tet holiday. As a result, Robusta's most active contract (May/22) retreated USD 29 (1.3%) to close the week quoted at USD 2213/ton. In Brazil, the CEPEA indicator for the Robusta coffee ended the week quoted at BRL 822.28/bag, decreasing only 0.7%.

During the week, in addition to the support due to the falling dollar, the sharp decline in certified stocks and preliminary data from Brazilian exports endorsed the upward trend. Between January 28 and February 4, Arabica certified stocks fell by 177,000 bags, down by 13.8%. As already mentioned in other StoneX publications, the strengthening of differentials and high logistics costs discourage companies from certifying coffee on the exchange, while this same scenario encourages the withdrawal of this coffee from certified stocks in consuming countries.

Besides the drop in stocks, preliminary data from the Secretariat of Foreign Trade (Secex) indicated that Brazilian coffee exports fell 19.7% in January, with 2.97 million bags exported, confirming the perspective of limited supply and logistical support problems. The official data for Brazilian exports to be released later this week by Cecafé.

Source: ICE – Intercontinental Exchange. Design: StoneX.

For the Robusta market, the price decrease observed in January - reflecting the greater availability of the variety in Vietnam, which could be noticed by the 57% increase in exports in December and 9% in January -, associated with the drop in the USDBRL, contributed to the differentials in Brazil. While the market retreated in London, prices remained firm in Brazil, supported by the firm demand for the variety in the domestic market. Thus, since the beginning of the year, the differentials had an upward trend and from mid-January onwards became positive, closing the last week around USD 160/ton; that is, the Brazilian domestic market paid a premium of USD 160 to the most active contract in the London market.

Source: ICE/London, CEPEA. Design: StoneX.

Besides the above factors, the estimates for Brazilian production and the global coffee balance are still the focus of market participants. As presented last week, some estimates for Brazilian production have already been released and showed a strong divergence, highlighting the market's uncertainties about Brazilian production.

In terms of weather, data from weather agencies indicate the continuation of La Niña until the beginning of autumn in the southern hemisphere, which continues to be a problem since this event has caused significant amounts of rain in Colombia and affected the country's production. FNC data indicate that the country produced 868,000 bags in January, a volume 20% lower than in January 2021, due to the impact of excessive rain on the country's production. 
 

MONTHLY COFFEE PRODUCTION IN COLOMBIA (THOUSAND BAGS)

Source: FNC. Design: StoneX.

The real/dollar pair closed last week quoted at BRL 5.325, showing a drop of 1.2% in the week and accumulating a variation of -4.5% in the year. Differently from the previous week, when the BRL appreciated despite the strong rise in the USD abroad, this week the external environment helped the exchange rate in Brazil to depreciate, with the dollar index moving in a similar direction to end with a strong retraction of 1.9%, quoted at 95.4 points. Global agents showed a greater appetite for risk despite the geopolitical conflict on the Russia-Ukraine border. They reacted to the decision to raise interest rates by the Central Bank of England and the firm statement by the president of the European Central Bank, which raised expectations that interest rate hikes in the eurozone could occur as early as 2022.

The Brazilian currency guaranteed its appreciation during the first two sessions of the week. The continuity of the capital flow into the Brazilian stock market acted favorably for this downward movement of the USDBRL. According to B3, the São Paulo Stock Exchange registered a net inflow of foreign capital of BRL 32.491 billion in January, more than double that of last December (BRL 14.547 billion) and higher than that of January 2020 (BRL 23.556 billion). This movement has been occurring in Brazil and in some emerging markets, where international investors have been pricing assets from certain sectors of the countries as "cheap" since they have not accompanied the rise of global markets in the last year.

The Brazilian currency drop has contributed to supporting coffee prices on the stock exchange. A strengthening Real makes marketing less attractive for Brazilian producers and exporters, who tend to reduce the number of deals to wait for more favorable moments. This reduction in supply tends to provide a bias towards higher coffee prices. A similar movement in the Colombian peso has also contributed in this sense.

The week was marked by the Monetary Policy Committee (Copom) decision to raise the basic exchange rate (Selic) by 150 basis points, going from 9.25% per year to 10.75% per year. However, despite the expected hike and the indication that the maximum levels of the Selic in 2022 should reach 12.00% (versus 11.75% in the previous meeting), agents reacted more cautiously to the indication that Copom should slow down the pace of adjustment in the next meeting, without specifying its magnitude. In addition, the decision highlighted that its monetary policy strategy for the convergence of inflation to the Central Bank's target considers 2023 "to a greater extent ."Thus, investors' understanding was that Copom would not maintain a strong pace of interest rate hikes to control inflation "at any cost" this year, which contributed to greater risk aversion in the second half of the week, with the real/dollar pair advancing from the low a BRL 5.273 recorded on Tuesday's session (2), before the release of the statement. On Tuesday (8), the market will follow last week's minutes of the Copom meeting, which is expected to present more information about the debates about the monetary authority's next steps.

This week, the agents should also follow the inflation indicators for January. The Brazilian Institute of Geography and Statistics (IBGE) will release the April Extended National Consumer Price Index (IPCA). The appreciation of the BRL in January may help mitigate the effects of accelerated inflation, which ended December with an accumulated 10.06% in 12 months and continues to be one of the main concerns of the country's investors. On the other hand, the rise in oil prices in the international market and the new adjustment in January in the fuel price indicate that inflation may continue to accelerate. 

In the United States, the Bureau of Labor Statistics (BLS) will release the Consumer Price Index (CPI) on Thursday (10), which should help guide expectations for the next monetary policy decisions in the country, since the Fed has adopted a very broad discourse, which has kept the bets for an interest rate hike very dispersed.

 In case of a better-than-expected result, the expectation of higher interest rates in the United States to control price acceleration tends to raise the demand for the American currency, which can act against currencies of economies considered riskier, such as Brazil and Colombia.