By: StoneX Intelligence Brazil, StoneX Intelligence Brazil
• Arabica prices dropped by 580 points (2.9%) in NY, closing the week quoted at US₵ 190.90/lb.
• Cepea’s Arabica indicator dropped by 7.3% in the week, quoted at BRL 1,070.11/bag.
• Robusta prices dropped by 2.7% in London to USD 1996/t.
• Cepea’s Robusta indicator closed down by 7.7% at BRL 605.78/bag.
• Colombia receives above-average rainfall in September. ▲
• Arabica’s certified stocks dropped by 2.2% in the week ▲
• Fertilizer exchange ratio deteriorates amid declines in coffee prices. ▼
• Funds reduced their net balance by more than 70% on New York and London exchanges.
• Inflation in Europe creates concerns about coffee consumption ▼
• PMIs reveal retraction in the level of activity in the main global economies ▼
• The markets are expected to move during the week with a full economic calendar and on the eve of the second round of elections in Brazil
• Central Bank of Brazil and ECB to decide on monetary policy this week
▼ Bearish Factors ▲ Bullish Factors
As presented last week, the increase in Brazilian exports, the favorable weather, and risk aversion sentiment put coffee prices on a downward trajectory, which broke through the US₵ 200.00/lb level. Such a trend extended into the past week, with coffee futures prices falling again, reaching their lowest level since September 2021. Last week, despite the drop in the dollar, the market continued to react to concerns about global coffee demand and the inflationary process, as will be addressed in a specific section below.
In New York (ICE), the most active contract (Dec/22) ended the week with a 580-point (2.9%) retreat, quoted at US₵ 190.90/lb. In London (ICE Europe), prices also ended the week with losses, with the most active Robusta coffee contract (Jan/22) ending the week with a loss of USD 55/t (2.7%), quoted at USD 1996/t.
Weekly intraday (most active contract) October 17 to 21
In Brazil, coffee prices posted sharp declines, reacting to the drop in prices abroad and the USDBRL depreciation during the week. Cepea's Arabica indicator fell 7.32% and ended the week quoted at BRL 1,070.11/bag in New York. Following the trend of the Arabica, the Robusta coffee saw a 7.7% drop, closing Friday quoted at BRL 605.78/bag.
In the coming weeks, the coffee market will continue to monitor the weather situation and the possible impact of La Niña in Brazil and abroad. Any adverse weather condition in Brazil still has great potential to cause damage due to the stages the Brazilian crops are going through. In Colombia, as a reflection of La Niña, above-average rainfall volumes were recorded in September in part of the producing regions, which have already been impacted by rainfall excess.
In addition, the low level of Arabica’s certified stocks continues to be a factor, which fell last week, closing on Friday with a volume of 390.6 thousand bags, a fall of 2.5% for the week. Finally, in the coming weeks, the disclosure of the export data of the countries will be reflected.
According to StoneX, the exchange ratio of Arabica coffee and fertilizers, an index that indicates the purchasing power of fertilizers by producers, has shown a significant advance in recent weeks, showing that there has been a reduction in the purchasing power of coffee growers. However, despite the increase, exchange ratio levels are still well below the level observed in the year's first half. The exchange ratios of Urea and KCl have advanced and are above the last 5-year average, while MAP and SAM have advanced but are still below the 5-year average.
Fertilizers and Arabica coffee exchange ratio (bags/mt)
StoneX data indicates that the advance in exchange ratio comes amid falling fertilizer prices, so the loss in producer purchasing power has happened mainly due to the sharper drop in coffee prices. Between October 6 and 20, urea prices lost 0.8%, MAP 4.2% and KCl 4.4%, ending October 20 quoted at USD 643/t, USD 632/t and USD 628/t (CFR Brazil), respectively. In this same period, Arabica coffee futures prices fell by 12.2%.
In addition to the fundamentals mentioned above, there was a strong selloff and contracts by Managed Money and index funds for the Arabica futures market in New York. The latest COT/CFTC report indicated that between October 11 and 18, funds in New York reduced their net long position by 78.6%, going from 23.8 thousand contracts to only 5.1 thousand contracts. Index funds also showed a strong decline in their long positions by more than 4,000 contracts to 36.6 thousand contracts - index funds do not follow coffee fundamentals. Still, they react to macroeconomic factors, especially risk aversion. Between 11 and 18/10, prices for the type "C" contract retreated 2275 points (10.4%) to US₵ 195.10/lb.
Spec funds position in coffee futures and options on the New York Stock Exchange
In London, funds also reduced their long positions in the Robusta coffee market. According to the latest COT report, between October 11 to 18, funds showed a 71.3% decrease, going from 14.6 to 4.2 thousand net long contracts. In the same period, Robusta coffee futures prices dropped by 5.8% to USD 2,034/ton on October 18.
Last week showed a significant depreciation of the USDBRL by 3.3% to close quoted at BRL 5.15. The dollar index also signaled a drop in the American currency abroad by posting a retreat of 1.3% to close at 111.8 points. The significant drop in the exchange rate could not contain another weekly devaluation of coffee prices. However, the more intense drop on Thursday and Friday may have contributed to New York's coffee not retreating to levels below US₵ 190.00/lb.
Global markets did not show many directions, oscillating between moments of risk aversion with the uncertainties regarding the fall in activity and the high inflation in the global scenario and moments of recovery of some risk appetite, as observed after the resignation of British Prime Minister Liz Truss after a troubled period of only 44 days in power. Investors continued to show a good appetite for Brazilian assets, reacting positively to updated polls that showed a more even presidential race.
Besides the improved weather in Brazil and supply-side factors, the September inflation data for the eurozone released by Eurostat is one of the main bearish factors linked to demand. Even with the 0.6% increase from August to September not being among the largest monthly increases, there is still no evidence that there should be a continued deceleration, with the accumulated over 12 months from 7.6% to 8.7%.
Evolution of consumer coffee inflation in the eurozone over the last 12 months
The year-on-year comparison for each month shows the criticality of the European picture even more. For example, September this year compared to the same month in 2021 points to coffee prices 15.6% higher for consumers in the eurozone.
It is worth remembering that in the case of Europe, a region that in recent years has had to deal at various times with a rate of inflation growth below the target set by the European Central Bank (ECB), the current context is quite atypical, which has increased the fear that the population will be discouraged from maintaining an annual increase in consumption. Last Thursday (20), Citi bank reported that it estimates that a global recession could reduce total coffee consumption by 3 million bags. New estimates in this sense and the release of new pessimistic data in major consuming economies tend to contribute as an element of pressure on prices.
This Monday (28), the PMI forecasts contribute to this scenario. According to S&P Global, the preliminary result of the consolidated PMI for the eurozone varied from 48.1 points in September to 47.1 points in October, staying below analysts' projections (47.5 points) and indicating that the activity level in the economic block should stay for the fourth consecutive month below the 50-point threshold that separates an expansion and contraction condition.
Annual change in consumer coffee prices in the eurozone
This week's economic calendar also features a series of indicators that should impact the global markets. In the United States, the Federal Reserve will release the September Personal Consumption Expenditure Price Index (PCE), the main inflation indicator used by the monetary authority. It is worth noting that Fed members will begin the required quiet period for the November 2 monetary policy decision. The Bureau of Economic Analysis (BEA) will also release the preliminary result for the Q3 GDP, with the median projection of analysts betting on a 2.4% expansion of the world's largest economy after having registered retraction in the first two quarters of the year.
In the eurozone, the highlight is the ECB's monetary policy decision on Thursday (27). In Brazil, the IPCA-15, released by the IBGE, and the IGP-M, published by the FGV, should give the first indications about inflation in the country this month. On Wednesday (26), there will be a monetary policy decision by the Monetary Policy Committee (Copom) of the Central Bank of Brazil (BC). The Central Bank is expected to maintain the basic interest rate (Selic) at 13.75% p.a., with the agents paying attention to how Copom plans its next decisions after deflation results in recent months and relatively positive indicators for economic activity. Moreover, the last week before the decision of the second round of the presidential elections in Brazil, with the latest polls indicating a tighter dispute between Jair Bolsonaro and Luís Inácio Lula da Silva should contribute to greater volatility in the Brazilian exchange market.
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