Coffee Weekly Report

Following a week of high volatility after the passage of the first polar mass of the year, the coffee market trended higher to end last week, reflecting the concerns of agents with the weather market and under the effect of technical factors - part of the advances observed during the week was the result of hedging short positions, in an environment of low liquidity. In addition, the sharp drop in the USDBRL contributed to the upward trend in New York. 

Although the models do not show any imminent risk of frost, market participants remain reactive and alert to the possibility of the arrival of new cold waves. The polar mass that hit the coffee belt in the previous week could not provoke frost in a generalized way, but it resulted in the event in localized regions and at high altitudes. Furthermore, the first polar mass reached Brazil even before the beginning of winter so that the weather market may dominate the movements in the coming months.
 

Weekly intraday (most active contract) - May 23 to 27

Arabica’s most active contract (July/22) ended Friday’s session (27) at US₵ 229.45/lb, posting an increase of 1360 points (6.3%) compared to the previous Friday (20). Following the same trend, in Brazil, the Cepea's Arabica indicator ended the week with a drop of 2.5%, quoted at BRL 1,276.44/lb – the lower increase than in the international market was due to the dollar depreciation. 

For the Robusta market, the most active contract (July/22) ended the week with an increase of USD 41/ton (2.0%), ending the week at USD 2,097. In Brazil, following the trend of the last weeks, with the harvest progress and the greater availability of Robusta coffee, the Cepea indicator for the variety ended the week down by 3.2%, quoted at BRL 723.84/bag.

The weather market should be the protagonist of the coffee price movements in the coming months. Besides the possibility of new cold waves, which support prices and promote volatility, part of the attention is on the dry weather in Brazil. The weather data observed indicates that part of the coffee belt has received below-average rainfall volumes in recent months. In addition, the possibility of the La Niña maintenance, which is associated with delayed rainfall during the flowering period, should also increasingly arouse concern among agents. 

Rainfall versus historical average over the last 60 days (%)

Source:  StoneX, with data provided by NOAA / NCEP / GFS: Global Forecast System), 2021.

As presented in the last Weekly Coffee Report, NOAA's probabilistic forecast model indicates a chance above 55% for La Niña to continue throughout the year's second half. However, the data presented by the Australian agency BOM indicates that several other models, including the European model ECWMF, predict a return to a neutral condition during the winter. 

In addition to the weather issues, there is great concern about coffee consumption in 2022. Besides the problems linked to the Russian-Ukrainian war, which directly impacts coffee consumption in those countries, there is the risk of a reduction in the pace of consumption amid inflation and lower growth in the global economy.

Even with the reduction in coffee export volumes, both in Brazil and in other countries such as Colombia and Honduras, stocks accumulate in importing countries. In addition to the 2.5% advance in GCA stocks, which was covered in the last edition of this report, coffee stocks in Japan increased 11.6% in April to 3.1 million bags compared to April 2021. It is still too early to be certain about this situation, and much more data is yet to be evaluated, but this is an aspect that should be monitored.

Last week only the attache report for Ecuador was released, indicating a 36% increase in the country's production in 2022/23 to 354,000 bags. So far, reports for eight countries have been released: Indonesia, Uganda, Peru, Nicaragua, Costa Rica, Kenya, and El Salvador. Partial data indicate a 5% increase in production and a 3.1% increase in exports in 2022/23. However, figures for major producing countries such as Brazil, Vietnam, and Colombia have not yet been released, which should occur in the next two weeks. 

Summary of estimates from USDA Attache reports

Source: USDA. Design: StoneX.

The fear of global agents that the US economy may grow less than expected has been one of the main factors pressuring the American currency in recent weeks. In May, the release of weak results for large retail companies in the country, which also stated that they should face difficulties in the second quarter, highlighted the difficulties that the world's largest economy faces in reconciling continued growth with historically high and widespread inflation. The results motivated the outflow of capital from the United States, especially from the stock market, directed to assets in other advanced economies, commodities and emerging economies.

Recent indicators have raised the perception that the Federal Reserve has less room to continue with the firm contractionary movement in its monetary policy without compromising the economy, at the risk of a drop in the US GDP. The minutes of the last Federal Open Market Committee (FOMC) meeting released last week corroborated this scenario. Accordingly, the Committee members indicated that they support two more 0.5 percentage point increases in the document. From this point on, they will reassess the economic situation to define the next steps.

On the other hand, the European Central Bank (ECB) signal that it will raise the basic interest rate in the third quarter contributes to attracting investments in the European currency. During the dollar's downward movement in May, the euro had been recovering from its lows in 2017 reached earlier this month.

Also worth mentioning is the news of improvement in the Covid-19 situation in China. According to statements from Chinese authorities on Monday, the country reported the lowest number of new daily cases in three months. The government of Shanghai, an important financial and industrial hub and city that owns one of the most important ports in the world, said it would adopt a series of measures to stimulate the local economy after the impacts of the recent lockdowns, among them allowing the resumption of operation of all factories from Wednesday (01). The lower number of cases in Beijing has also eased fears that the city could tighten its social distancing measures. The signs that the functioning of the Chinese economy should slowly return to normal alleviate fears about even weaker growth in the world's second-largest economy, as well as about new bottlenecks in global logistics chains. For coffee, the return to normalcy should also favor a resumption of out-of-home consumption, which has a large share in the region. 

On this week's schedule, agents should follow the release of the May PMIs by Markit, with expectations that they will show a cooling in the level of activity in global economies in the month. In addition, markets are also awaiting the monthly labor market data in the United States, released by the Bureau of Labor Statistics (BLS), with expectations that the report will indicate lower job creation in the country in May.

Sources: ICE/NY; ICE/EU; B3; Commodity Network Trader’s Pro.