By: StoneX Intelligence Brazil, StoneX Intelligence Brazil
• Arabica prices dropped by 930 points (-3.9%) in NY, closing the week quoted at US₵ 228.80/lb.
• Cepea’s Arabica indicator dropped by 1.5% in the week, quoted at BRL 1,331.04/bag.
• Robusta prices down by 2.5% in London to USD 2223//t.
• Cepea’s Robusta indicator high by 0.3% to close at BRL 749.72/bag.
• Despite the drop in the week, coffee posts a strong increase in August
• Preliminary data indicate a reduction in Brazilian coffee exports in August ▲
• Honduran exports continue to drop significantly amid production problems ▲
• Speculators have extended long positions in NY to their highest level since March ▲
• Weather reports reduce rainfall prospects for the coffee belt ▲
• Market awaits countries’ export data and continues to track weather
• NOAA to update El Niño/La Niña forecasts on Thursday (8)
• USDBRL appreciates amid global risk aversion ▼
• Global market remains apprehensive about countries' tight monetary policies and the risk of global economic recession ▼
• ECB decision and August IPCA should be on focus this week
▼ Bearish Factors ▲ Bullish Factors
Coffee futures ended the last week lower on their main exchanges. Although the fundamentals continued to weigh more bullishly, prices underwent a technical correction after the notable increase recorded in the previous week. Additionally, a more pessimistic macroeconomic scenario, which pressured the commodities complex and boosted the dollar, and signs of a possible return of rainfall in the second week of September contributed to the movement.
Weekly intraday (most active contract) – August 29 to September 02
In New York (ICE), the most active contract (Dec/22) gradually retreated over the last few sessions, accumulating a drop of 930 points (3.9%) from the previous Friday (26) to close at US₵ 228.80/lb. It is worth mentioning that the most intense drop observed last Friday (2) was due to the forecasts of some rainfall in parts of the coffee belt for mid-September. In London (ICE Europe), the movements showed a similar trend, with the most active Robusta coffee contract (Nov/22) retreating USD 56 (-2.5%) to close the period at USD 2223/t.
In the domestic market, the oscillations showed less intensity compared to the international market. Cepea's Arabica indicator pointed to a trend in the same direction as the NY exchange, with a weekly drop of 1.5% to close at BRL 1331.04/bag. On the other hand, Robusta coffee registered a slight increase of 0.3%, closing at BRL 749.72/bag.
The pause in the rally of coffee quotes in the last week indicates that the most intense concerns about the Brazilian crop were largely priced between August 22 and 26. New events are necessary for prices to move again similarly. It is also noteworthy that despite the depreciation in recent days, coffee prices ended the month with a significant appreciation. In New York, the monthly gain was 10%, quoted at US₵ 235.25/lb on August 31 versus US₵ 213.8/lb at the end of July, the best monthly close since February. In London, the monthly gain was 10.9%, securing the best one-month close since December last year.
Monthly settlement of the most active contract on the New York Stock Exchange in 2022
Despite last week's retreat, the trend is for coffee futures to remain in a higher price range since fears about the yield of the current crop and the flowering of the 2023/24 crop should still weigh more heavily on the market than fears about possible drops in consumption amid the risk of a global recession.
Last week, the Secretariat of Foreign Trade (Secex) updated the information on the Brazilian trade balance for the last month. The numbers, considered as a preview to Cecafé's official results, point to a total of 2.334 million bags exported, 19.0% less than the 2.882 million shipped in August of last year and a 4.8% drop in relation to the previous month. However, the information can generate some discomfort in the market while the official data from Cecafé are not revealed since, seasonally, Brazil usually presents a growth of 14.7% in the passage from July to August, according to the average of the last five years.
If confirmed, this information could add further insecurity in relation to the difficulties encountered by the Brazilian market in closing deals and disposing of the coffee from the current crop to the international markets. However, it is worth remembering that Secex and Cecafé's data eventually present significant disparities among themselves. The current information should be seen as a preview or a trend for what to expect from official data.
Additionally, on the supply side, data from other major Arabica coffee producers have not been optimistic either, such as the case of Honduras. The country, the 4th largest producer of Arabica coffee and an important supplier to the North American market, has seen strong impacts on its current crop due mainly to a high incidence of coffee leaf rust. This fungal disease affects the plants during periods of high moisture.
According to the data released by the Honduran Coffee Institute (IHCafe), the country exported last month 297 thousand bags of coffee, a significant decrease of 29% compared to the 418 thousand bags exported in August last year. As a result, total exports from Honduras for the current season (October 21 to September 22) have reached 4.58 million bags, 18.7% lower than the 5.63 million bags for the same period in the previous year, with only one month remaining in the crop year. It is worth remembering that due to the problems the country is facing, the USDA revised in May its estimates for the country's production in the current year from 6.8 million bags to 5.4 million bags, a decrease of 20.6%.
The latest Commitment of Traders report by the CFTC revealed a significant expansion in long positions by spec funds in New York coffee futures and options. According to the report, speculators increased their long positions by 7,755 between August 23 and 30, going to 40,278, with an increase of only 778 short positions to 9,524. Thus, the specs' net long position went from 23,777 to 30,754 lots. In the same period, prices advanced 695 points, going from US₵ 228.25/lb to US₵ 235.20/lb. Interestingly, with the changes, both the total lots bought and the net balance reached their highest positions since March 08, when the coffee market had been unwinding a significantly bullish bias after the start of the Russian-Ukrainian war on February 24. The move corroborates the more bullish bias generally observed in the coffee market in recent weeks. On the other hand, it should be noted that a significantly high long position by speculators opens room for a more abrupt reversal in the case of a change in fundamentals.
Spec funds position in coffee futures and options vs. most active contract on ICE NY
For this week, while the market awaits production and export data from Colombia, which should be released in the next few days, and from Cecafé, to be released between the end of this week and the beginning of next week, the weather, as expected for a pre-flowering period, should be in the spotlight. As mentioned in other editions of this report, rainfall forecasts beyond 48 hours are considered to have a high degree of inaccuracy and are likely to change. This type of change to long-term forecasts has proven frequent in recent weeks.
History and rainfall forecast for Brazil's coffee-producing regions (mm) - September 05, 2022
Last Friday (2), weather forecasts indicated the arrival of better rainfall volumes in the southern region of the coffee belt from September 10, which contributed to putting pressure on prices on the stock exchange. However, on Monday (September 05), the forecast models no longer count on the arrival of this rainfall, indicating a still dry climate for this week and next. If it remains in the next updates, this scenario may contribute to a new price boost at the trade opening on Tuesday (6) since the US stock exchange was closed today due to the Labor Day holiday in the United States. Market participants should also follow the update of the El Niño / La Niña probability forecasts from the NOAA, which is expected to be released on Thursday (8). They will contribute to understanding how strongly La Niña may continue to affect the weather in major global producers.
The foreign exchange market oscillated in the last few weeks to influence the dollar quotes. The release of indicators pointing to a good level of activity and employment in the United States has indicated that the Federal Reserve should raise the country's basic interest rate in greater intensity to control inflation in the country, which is at historically high levels. Therefore, the prospect of a reduction in the differential between Brazilian and American interest rates tends to attract a greater flow of investments into fixed-income assets denominated in dollars.
The energy crisis in Europe has also been a source of risk aversion among agents. As highlighted in the FX Weekly report, after having already reduced the flow of natural gas through the Nord Stream 1 pipeline to 20% of its maximum capacity, citing problems in its turbines, Moscow halted the supply for three days this week for exceptional maintenance and then suspended it indefinitely citing mechanical problems. Although stock levels of the input are close to 80% of the total capacity for the European Union, continuous supply is essential to ensure the availability of the input during the winter months. One of the consequences of the uncertainty about the supply of this raw material is the sharp increase in natural gas prices and, as a consequence, in electricity costs, which can be seen in the difference between the price indexes for producers (free) and consumers (tighter).
Global markets should also follow the monetary policy decision of the European Central Bank (ECB) this week on Thursday (8). After the release of the industrial PMI for the eurozone shows a retraction in the level of activity in the sector for the second consecutive month, and inflation in the region in August remained at the highest level of the historical series that started in 1997 (a 9.1% accumulated in 12 months), there are expectations that the ECB may promote an unusual adjustment of 0.75 p.p. in the interest rate. The strong adjustment, on the one hand, seeks to help control the acceleration of prices in the economic bloc; on the other, it could further accentuate the prospect of economic recession in the region, increasing the risk aversion of agents and the risks of a negative impact on the demand for many products and foodstuffs.
In Brazil, it is worth noting this week the release of the National Broad Consumer Price Index (IPCA) on Friday, with expectations that the indicator will show deflation in the month due to the recent subsidies from the federal government to the fuel and electricity sectors and Petrobras' reductions on gasoline prices at the refineries. The result may contribute to a greater flow of investments in the Brazilian economy, which would act favorably on the BRL.
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Brazil could still deliver a record arabica crop, but the bigger question for growers is what the next season holds. Out of season flowering and the swing of El Niño have put the spotlight on the rains still to come.
Daily coffee report
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