By: StoneX Intelligence Brazil, StoneX Intelligence Brazil
• Arabica coffee prices retreated 190 points (0.8%) in NY during the week, ending at US₵ 220.05/lb.
• Cepea’s Arabica indicator dropped by 2.1% to close at BRL 1,278.09/bag.
• Robusta coffee prices increased by USD 72 (3.4%) in London, to USD 2167/t.
• The Cepea’s Robusta indicator showed a recovery of 1.5% and ended the week quoted at BRL 769.74/bag.
• Tensions in Russia and Ukraine continue to put pressure on coffee prices ▼
• Concerns that the conflict in Eastern Europe could affect coffee consumption ▼
• Torrential rains continue to cause losses and put Colombia on alert ▲
• Models continue to point to significant rainfall volumes in Colombia over the next two weeks ▲
• NOAA: La Niña probability at 37% between June and August
• GCA: after making a mistake, the association points to a 0.5% drop in stocks at US ports ▲
• BRL continues to benefit from the search for commodity-related assets ▲
• FOMC makes first interest rate hike in five years
• Copom raises Selic to 11.75%.▲
• Market raises projections for higher inflation and Selic in 2022
▼ Bearish Factors ▲ Bullish Factors
For the second consecutive week, coffee prices ended the week with mixed results, with New York lower and London higher; the divergence in the movements of the exchanges contributed to strengthening the arbitrage between the New York and London contracts, which advanced 16.2% since the beginning of the month, to US₵ - 121.75 /lb (Robusta-Arabica). Arabica’s most active contract (May/22) ended Friday (18) at US₵ 220.05/lb, a retreat of 190 points (0.85%) compared to the previous Friday (11). In Brazil, Cepea’s Arabica indicator followed the movement in New York and ended the week lower, showing a decline of BRL 27.47 (2.1%), quoted at BRL 1,278.09/bag, the most intense retreat was the result of the dollar depreciation of 1.1% during the week.
In contrast to what happened in New York, the Robusta coffee futures ended the week higher. Robusta’s most active contract (May/22) advanced USD 72 (3.4%) to end the week at USD 2,167/t. Cepea’s Robusta indicator ended the week with a recovery of 1.5% quoted at BRL 769.74/bag.
The coffee market is under pressure without much news in terms of fundamentals due to the impacts and uncertainties linked to the armed conflict between Russia and Ukraine. In addition to the risk aversion sentiment, concerns about the impact of the war on coffee consumption in countries involved in the conflict contribute to putting pressure on prices; in a recent article published on the Notícias Agrícolas website, the President of the Vitória Coffee Trade Center, Marcio Cândido, pointed out that negotiations of soluble coffees with Eastern Europe have been paralyzed for more than 20 days, as a reflection of the war taking place in the region.
Despite this uncertain scenario, other bullish factors are still present in the current context. Estimates for Brazilian production in 2022/23 vary from 55.7 million bags by Conab to 66.5 million bags by Rabobank. However, most estimates are around 60 million bags, which corroborates the expectation of heavy losses in the 2022/23 season – Brazilian production could reach volumes close to 70 million bags had the weather been favorable. In the previous study released by StoneX, Brazilian coffee production was estimated at 58.9 million bags for the season.
Excessive rainfall continues to affect coffee production in Colombia. As has been commented on in other editions of this report, excessive rainfall in Colombia has caused flooding and landslides, which has hurt the country's coffee production. According to the FNC, coffee production was 16% lower in February due to excessive rainfall. In addition, there is an expectation that the production for the first half of this year will be reduced by more than 10%.
The excessive volume of rainfall in Colombia reflects the La Niña condition, which has affected the climate in the world since the second half of last year. Concerning this phenomenon, the great discrepancy in the models generates a feeling of uncertainty regarding this scenario. A few weeks ago, the NOAA model indicated that La Niña would end in early fall in the southern hemisphere. However, the probabilistic analysis released by the agency on March 10 showed a strong increase in the probability of La Niña to 53% between June and August. In the latest update released on 03/18, the models again pointed to the end of La Niña in the coming months, with the probability of La Niña between June-August dropping to 37%. The data from the Australian agency BOM, on the other hand, points to a neutral scenario starting in June. In addition to the problems of excess rainfall in Colombia, in Brazil, the occurrence of La Niña may be associated with a delay in the arrival of rainfall in the coffee belt in the second half of the year, which could be a problem for the development of the next harvest. Therefore, monitoring this situation becomes critical to anticipate weather conditions in the second half of the year.
For Robusta, one factor that has positively impacted prices has been the new wave of Covid-19 infections in China. Following the increase in cases, the Chinese government has again taken measures to prevent the spread of the disease. Although China is not directly linked to the Robusta market, the concerns revolve around the possible impacts of this new wave in Vietnam. As in China, the Vietnamese government adopts strict policies to prevent the spread of the disease, which can cause problems in the country's supply chain, as already observed last year.
The latest report released by the Green Coffee Association on March 15 indicated that coffee stocks at US ports fell by 30,493 bags (0.5%) in February compared to the previous month to 5,765,348 bags. The volume observed in February is still 0.4% lower compared to stocks in the same month last year. The average stock level for February is 6,131,581 bags when stocks have advanced 63,000 bags on average over the past five years.
On March 15, GCA initially announced the advance of more than 357,000 bags, pulled mainly by the increase in stocks at the Jacksonville, Florida port. However, analysts disagreed and questioned GCA, which noted the error regarding Jacksonville stocks and released adjusted figures in February.
Still supported by the movement of the search for Brazilian assets related to commodities and the new increase in the basic interest rate (Selic) in the country, the Brazilian real appreciated again last week. However, the real/dollar pair dropped 0.7% in the period, ending Friday (18) quoted at BRL 5.017. In the foreign scenario, the US currency followed a similar direction. It retreated against a basket of currencies of advanced economies, pressured by signs of small advances in negotiations between Russia and Ukraine to end an armed conflict that, despite no concrete definition, generated a reduction in risk aversion among investors. Thus, the dollar index registered a drop of 0.9%, closing quoted at 98.2 points.
Besides the concerns with the impacts of the war and the effects that a prolongation of the conflict could bring to the dynamics of the global economy, the markets reflected the monetary policy decisions in the United States and Brazil.
The Federal Reserve’s Federal Open Market Committee (FOMC) confirmed the expectations of most analysts and raised the country's basic interest rate by 0.25 basis points to a range between 0.25% and 0.5% per year. According to Fed Chairman Jerome Powell, the Committee understands that each of the next six meetings this year has the potential for an interest rate adjustment decision. According to the FOMC members' quarterly projections, 12 of the 16 members project at least a similar increase at the next few meetings, with seven members believing that the interest rate could stay above 2.0% later this year.
It is also worth mentioning the change in the members' projections regarding some of the main economic indicators, already considering the impact of the indicators observed at the beginning of the year and the impacts of the war on the outlook for the year. The changes were notable for economic growth, with the median of the members' projections betting on a 2.8% growth in 2022, a significant retreat from the 4.0% expected in the last projections released in December. The inflation scenario also showed a visible deterioration, with the projections remaining at 4.3%, above the 2.6% estimated in December.
In Brazil, the Central Bank's Monetary Policy Committee (Copom) raised the basic interest rate (Selic) by one percentage point, from 10.75% to 11.75%, signaling that another increase will take place in the next meeting. In a communiqué, Copom highlighted the deterioration of the international scenario, stating that it will continue to monitor the situation. If the conditions worsen, the monetary tightening cycle may advance even further. This Tuesday (22), the minutes of the Copom meeting are expected to present more details about the collegiate discussion, and agents should look for clues of possible signs of higher interest rate hikes than forecast by the Central Bank.
On Monday, the Central Bank's Focus Bulletin showed continuity in the adjustments of market expectations since the start of the war and its effects on the rise in the prices of several commodities. For the IPCA, the market now projects 6.59% in 2022, up from 6.45% last week and 5.56% a month ago. After the Copom meeting, the median of the agents surveyed now shows the Selic rate ending at 13.0% a year, above the 12.75% projected last week. As for economic growth, the market expects Brazil to benefit from the current scenario of appreciated commodities and interruption in the supply of Russian products to several countries. The bets of the latest Focus Bulletin for the GDP point to a growth of 0.5%, a slight advance compared to last week (0.49%) but a considerable advance compared to a month ago (0.3%). However, the prospect of a slow recovery of the Brazilian economy remains.
This week, besides the Copom minutes, the agents should follow the quarterly inflation report from the Central Bank on Thursday (24) and the release by the IBGE of the IPCA-15 on Friday (25), which should bring a preview of the first effects of the war on the acceleration of prices in the country.
Abroad, besides following up on whether there will be any progress in the negotiations between Russia and Ukraine for a ceasefire, the market should follow the statements of several members of the FOMC that will take place this week to understand better the positioning of the members and what the possibilities are that there will be higher hikes in the American interest rate in the upcoming meetings.
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