Coffee Weekly Report

Read our latest special analysis - Coffee flowering remains at risk with La Niña for the third consecutive year

As has been observed in recent months, several bullish and bearish factors have acted in tandem to help keep coffee prices within a range. Since mid-February, prices have remained between US₵ 200.00/lb and US₵ 240.00/lb, which is not a narrow range but has limited the movements.
 
On the bullish side of fundamentals, we can highlight the drop in certified stocks to the lowest level over 23 years, the 20% drop in Honduran exports in 2021/22, the 31% drop in production, and the 25% drop in Colombian exports in September. Acting on the downside, we can highlight the return of rains and the opening of flowering in Brazil, the prospect that Honduran exports may grow in the next crop year, the concern with the possibility of the impact of inflation on coffee demand, the appreciation of the dollar and the feeling of risk aversion amid the prospect of a possible global recession. 

In New York (ICE), the most active contract (Dec/22) ended the week with a 345-point (1.6%) retreat, quoted at US₵ 218.10/lb. In London (ICE Europe), prices ended the week almost unchanged. Robusta's most active contract (Nov/22) ended the week with a gain of only USD 2/ton (0.09%), quoted at USD 2155/t.

Weekly intraday (most active contract) – October 03 to 7

In Brazil, Cepea’s Arabica indicator fell 4.5% and ended the week quoted at BRL 1,229.18/bag, reacting to the fall in New York and the sharp drop of the dollar. Following the trend of Arabica coffee, Robusta coffee saw a 5.5% drop, closing Friday quoted at R$696.75/bag.

Last week, certified stocks of Arabica coffee fell by 9,461 bags (2.2%) to 416,700 bags, the lowest volume in more than 23 years. Certified stocks are related to the level of coffee differentials in the origins, so stronger differentials discourage the certification of new coffees, as in the current scenario. 

The Robusta market continues to follow Vietnamese coffee exports. According to the country's customs, exports in September totaled 1.54 million bags, a drop of 17.8% compared to the previous month and 7.8% compared to September 2021. 

However, considering the crop year (Oct-Sept), the country exported 28.6 million bags, a volume 15.4% higher than the total exported during the previous crop year, which totaled 24.7 million bags. In addition, the decline in exports occurs while the country is still in its inter-crop period, with the next harvest scheduled to begin in mid-November. 
 

Evolution of coffee exports by Vietnam (million bags)

Source: Vietnam Customs. Design: StoneX. 

Strong coffee price inflation raises the alarm about the possible impact on coffee consumption. Despite proving to be a rather inelastic commodity, strong price inflation in the US and Europe has worried agents. According to Eurostat data, coffee prices were 17% higher in August than in 2021. Moreover, coffee price inflation has been advancing in the US, while it continues to decline in Brazil after peaking in April. 

In an interview published by Reuters, the director of the International Coffee Organization, Vanusia Nogueira, indicated that consumers are switching from coffee shops to home consumption. However, she stressed that "there should not be impacts in terms of volume, but rather in the way coffee is consumed and in the quality."
 

Consumer prices 12-month accumulated inflation in roasted and ground coffee

Source: IBGE, BLS, Eurostat. Design: StoneX.

This week, the market should reflect the release by Cecafé of Brazilian coffee exports in September. The first two months of the 2022/23 crop showed numbers below the average of recent years; however, they were impacted mainly by lower exports of Robusta coffee, reduced due to higher demand and better prices in the domestic market. 

On Thursday (13), the NOAA will update its La Niña/El Niño probability forecast. Agents should also maintain some caution while awaiting data on coffee stocks at US ports, which will only be published on Monday (17).

This scenario indicates greater possibilities for projects more in line with the market's interests, while there would be more difficulties in reversing proposals and projects already approved in the past. This probable dynamic indicates that, regardless of the president-elect, a more conservative Congress mitigates the risk of major changes or reforms and that the candidates who will compete in the second round of the presidential race on October 30, Lula and Bolsonaro, will have to get closer to the center parties and make more concessions to guarantee an eventual victory.

Abroad, the feeling of greater risk aversion took over markets once again after the release of new data indicating a continued slowdown in the level of activity in the major global economies. In Europe, S&P Global reported that the consolidated PMI dropped from 48.9 in August to 48.1 points in September, remaining below the 50-point level that separates an expanding and contracting condition for the third month. The prospect of recession in the region while producer and consumer inflation remains historically high, the prospect of recession in the region keeps concerns about a possible slowdown in the level of coffee demand growth in the main global consuming region on the agenda.

In the United States, the ISM Institute revealed a September manufacturing PMI at 48.4 points, pointing to a worsening contraction in industrial activity from August's result (49.6) and the third consecutive month below the 50-point threshold. Additionally, the Bureau of Labor Statistics (BLS) revealed that 263,000 new jobs were created in the country in September, which was above projections, which pointed to 250,000, but below the record of August, when 315,000 new jobs were created.

Amid the releases, statements from various members of the Federal Reserve throughout the week reinforced the US central bank's commitment to bringing inflation back to the 2.0% level, indicating that they will continue to raise the interest rate into the tighter territory and keep it elevated for some time. In addition, the leaders of the American monetary authority have reinforced that there is little evidence that inflation has already reached its tipping point and that not controlling it now could make it much more difficult and painful for the economy to restore it in the future.

On this week's calendar, it is worth noting the release by the BLS of the Consumer Price Index (CPI) and the Producer Price Index (PPI) for September. The agents' projections point to a slight acceleration for both, but the accumulated in 12 months shows some decrease. 

It is worth mentioning that this is the last inflation indicator before the Fed's next interest rate decision on November 2. Lower-than-expected results may significantly alter the bets about the intensity of the Fed's monetary tightening. Before the last decision in September, a better-than-expected result in August was responsible for part of the market to start projecting the possibility of a 1.0 percentage point increase in the basic interest rate, starting a bullish cycle in the dollar index that led the indicator to renew its 20-year highs at the end of September. If a similar event occurs, the dollar index may test these highs again, weakening most currencies of other economies.

In Brazil, the release by the IBGE of the National Broad Consumer Price Index (IPCA) for September stands out, with expectations that it will present a new retraction due to the government's measures to reduce fuel prices in the country.

It will also be important to follow the "core" IPCA, which removes volatile energy and food categories and has remained upward in recent months - indicating more disseminated inflation among consumer goods and services.

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