By: StoneX Intelligence Brazil, StoneX Intelligence Brazil
• Arabica dropped by 1300 points (7.7%) in NY, ending Friday (18), quoted at US₵ 155.10/lb.
• Cepea’s Arabica indicator dropped by 3.7% in the week, quoted at BRL 932.71/bag.
• Robusta prices dropped by 0.9% in London to USD 1811/t.
• Cepea’s Robusta indicator closed down by 0.5% to BRL 557.92/bag.
• The prospect of a larger crop in 2023 puts pressure on prices. ▼
• Coffee-producing regions in Brazil received good amounts of rain. ▼
• Certified stocks increased by almost 44,000 bags last week (10%). ▼
• Stocks pending classification increased by 113 thousand bags (25%) in the week. ▼
• USDA reports on coffee should be released in the coming weeks.
• USDBRL appreciates amid concerns about the fiscal scenario in Brazil. ▼
• Discussions about the Transition PEC raised agents' apprehension during the week. ▼
• Lower-than-expected inflation and Fed's commitment to inflation control affect FX market swings abroad.
• Covid-19 scenario in China raises risks of a new drop in the country's activity level. ▼
• With a holiday this week in the US, previews of PMIs and IPCA-15 are the highlights.
▼ Bearish Factors ▲ Bullish Factors
Following the trend observed since mid-October, coffee futures prices extended their losses last week. Overall, the bearish sentiment predominant in the market reflects the prospect of a large crop next year amid possibly weakened demand. In addition, the increase in certified and outstanding stocks also acted bearishly for prices.
In New York, the most active contract (Mar/23) ended Friday (18) at US₵155.10/lb, down by 1300 points (7.7%) from the previous Friday (11). In London, the most active contract (Jan/23) closed at USD 1811/t, down by 0.9% compared to the previous Friday.
Weekly intraday (most active contract) - November 14 to 18
Despite the significant drop in New York, the USDBRL appreciation in the week contributed to mitigating the coffee prices drop. Cepea's Arabica indicator posted a decline of 3.7%, ending Friday (18), quoted at BRL 932.71/bag. The Robusta coffee dropped by only 0.5%, closing Friday (18) at BRL 557.92/bag.
As commented in other editions of this report, the return and maintenance of rainfall in the coffee belt contribute to the market's perspective that the 2023/24 crop would be abundant. As seen in StoneX's weather report, the entire coffee belt in Brazil has received important volumes of rainfall, and the anomaly map has pointed to volumes at or above the historical average for most of the coffee belt. For the next 15 days, the report continues to indicate significant accumulated rainfall volumes. However, it is important to mention that it is still early to estimate the coffee crop. In addition, StoneX will conduct another crop tour in the coming months to estimate the Brazilian 2023/24 coffee production.
Rainfall anomaly in Brazil in the last 60 days compared to the average of the last 20 years
Over the last week, certified stocks of Arabica coffee have increased by more than 43.7 thousand bags (10%) to 497.8 thousand bags as of Friday (18). Furthermore, stocks pending classification increased by over 113,000 bags (25%) between November 11 and 18 to a total of almost 570,000 bags. If the pending stocks are approved in the classification process, they will be included in the total certified stocks of Arabica coffee, acting downward for prices. However, as we have reported in previous editions, current conditions have not been conducive to origins certifying new coffee. Therefore, it is possible that this coffee is being reclassified.
In the coming weeks, the attention of market participants will be on the release of the USDA's semi-annual coffee reports. According to the USDA's calendar, the reports for Brazil, Colombia, India, Indonesia and Vietnam will be released in November. In December, the report with the agency's perspectives on the global coffee supply and demand balance will be released. Regarding Brazilian production, the USDA may adjust its estimates for the country's production in 2022/23. Currently, the agency's estimate of 64.3 million bags is the highest available in the market and does not represent the perspective of most players, who believe in lower production.
The USDBRL showed an increase of 0.8% last week in the Brazilian exchange market, closing at BRL 5.375. On the other hand, the dollar index closed the period lower at 106.8 points, an increase of 0.6%. The volatility seen in the domestic scenario occurred mainly due to discussions and fiscal concerns about the Proposal of Amendment to the Constitution (PEC) for the Transition by the team of the country's next administration.
The formalization of the PEC last Thursday (17), which proposes the permanent removal of the Bolsa Família income transfer program from the constitutional spending cap, which would represent an estimated additional expense of BRL 175 billion, confirmed investors' fears regarding fiscal risks. During Thursday's session, after the announcement of the PEC, the USDBRL reached BRL 5.52, its highest level since January.
The foreign exchange market only showed relief from the bullish pressures after the declarations of the future vice-president, Geraldo Alckmin, who gave statements in a more moderate tone, classifying the current moment of the market as a "momentary" stress and stated that "there will be a primary surplus, debt reduction, but this cannot be done in 24 hours". Alckmin also stated that President Lula's government is committed to fiscal responsibility but that this cannot be an argument for not meeting social needs.
This week, the agents should continue to react to the discussions and possible changes in the PEC, especially related to the value or deadline for the permanence of the Bolsa Família program outside the spending cap, the main source of deadlock in Congress, which has been working on the possibility of a time limit for the benefit not to be adjusted to the constitutional spending limit.
Overseas, the discussions around a possible moderation in the pace of interest rate hikes by the Federal Reserve, mainly after the October Consumer Price Index (CPI), released two weeks ago, and the Producer Price Index (PPI), released last week, showed lower increases than previously projected by analysts.
Throughout the week, while on the one hand, agents tried to extend the optimism of the previous week, on the other hand, Fed members sought to curb some of this optimism during their public statements, emphasizing that even if the Fed should reduce the pace of monetary tightening from this point on, the final level of interest rates will be higher than previously anticipated.
The Republican party's winning majority in the House of Representatives has also been a source of some caution. On the one hand, this configuration change should make it difficult to approve Democratic projects and large expansions of fiscal policies and imply greater control of public accounts, which tends to be favorable for the dollar. On the other hand, as commented in the FX Weekly report, the fear is that the high degree of political polarization in the country will stimulate destructive behavior from the opposition, which is threatening to refuse to extend the public debt limit in the country and force an unprecedented paralysis of the American state.
Global markets are following the Covid-19 situation in China with some apprehension. The past week has seen an intense increase in cases, from a daily average of 3,731 to 16,016 cases. Due to the history of the country's zero-covid policies, there is concern that China may again adopt a stricter stance to control the spread of the virus, negatively affecting the recovery of the level of activity in the country.
The week's economic calendar is emptier abroad due to the Thanksgiving holiday in the United States on Thursday and Friday. The highlight goes to the indicators released on Wednesday (23), with the PMI forecasts for the United States and Europe and the minutes of the last meeting of the Federal Open Market Committee (FOMC).
In Brazil, the Consumer Price Index - 15 (IPCA-15) will be released on Thursday (24), with the country's preliminary figures for November inflation. The expectation is for an increase of 0.55% due to the increase in fuel prices, surpassing the results of the last four months, which oscillated between slight increases and retractions.
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