Coffee Weekly Report

By: StoneX Intelligence Brazil, StoneX Intelligence Brazil

Mon, 28 Nov 2022, 20:00

Coffee prices recover almost a thousand points in the week

Fernando Maximiliano

Leonardo Rossetti

With no news in terms of fundamentals, a correction occurs due to technical factors ; USDA releases report with adjustment in the production estimates of the main countries

HIGHLIGHTS

•   Arabica coffee recovered 995 points (6.4%) in NY, ending Friday (25), quoted at US₵ 165.05/lb.
•   Cepea’s Arabica indicator increased by 5.6% to close at BRL 984.78/bag.
•   Robusta prices increased by 2.5% to USD 1857/ton in London on Friday (25).
•   Cepea's Robusta indicator closes high by 5.9% at R$ 590.78/bag.
•   USDA reduces its estimates for Brazil, Colombia and Vietnam. ▲
•   USDA maintains Indonesia’s estimate and increases India’s. ▼
•   Trade keeping an eye on favorable weather in Brazil ▼
•   Colombia and Vietnam have already started harvesting. ▼
•   La Niña may bring rainfall excess to Colombia and Vietnam during harvest. ▲
•   USDBRL appreciated amid concerns about Brazil's fiscal scenario. ▼
•   The US economic activity and employment indicators should affect the Fed's decision expectations.
•   Details about the PEC and the next government's composition will be on the radar of the domestic market.

▼ Bearish Factors ▲ Bullish Factors

With no major news in terms of fundamentals, coffee futures prices were impacted by technical factors. However, ending the selloff that began a few weeks ago, futures prices tested the US₵155.00/lb level, recovering and reflecting a correction after extensive losses, less selling pressure from origins, and reduced contract liquidation by funds. In addition, moves in the week were reduced due to the US Thanksgiving holiday (11/24).

On November 15, funds in New York had a net short position of 23,378 contracts, which contributed to the perspective that shorts would not increase given that the number of short positions is higher than the average of the last five years at 11,735 contracts. Due to the holiday, the COT/CFTC data for 11/22 were not released on Friday (25) but will be released today (28).

In New York, the most active contract (Mar/23) ended Friday (25) at US₵165.05/lb, an advance of 995 points (6.4%) compared to the previous Friday (18). In London, the most active contract (Jan/23) closed at USD 1857/t, an increase of 2.5% compared to the previous Friday.

Weekly intraday (most active contract) - November 21 to 25

Source: CommodityNetwork Traders’ Pro. Design: StoneX.

Following the movements in international markets, coffee prices in the Brazilian domestic market showed a significant recovery in the week. The Cepea indicator for Arabica coffee showed an increase of 5.6%, ending Friday (25) at BRL 984.78/bag. On the other hand, the Robusta coffee showed a recovery of 5.9%, closing Friday (25) at BRL 590.78/bag.

Last week, the USDA released its semi-annual reports, which adjusted the agency's estimates for major coffee-producing countries in 2022/23. The USDA has adjusted production in Brazil down by 1.7 million bags (2.6%) to 62.6 million bags. Colombia's production is estimated at 12.6 million bags, representing a decrease of 400,000 bags (3.1%) over the previous estimate. For Vietnam, the USDA estimates production at 30.22 million bags, down by 2.2% from the first estimate. Indonesia's production was maintained at 11.35 million bags, and India's production was adjusted to 6.24 million bags, an increase of 8.7% over the previous estimate.

Partial update of USDA estimates

Source: USDA. Design: StoneX.

In the coming weeks, the market’s attention will be on weather conditions in Brazil, which has been favorable for the development of the next crop, and in other producing countries such as Colombia and Vietnam. Both countries have already started harvesting, with the availability of new coffee expected in the coming weeks. Yet under the effect of La Niña, the possible excess of rainfall in these countries could be a problem regarding harvesting pace and the quality of the coffees. In addition, in the next two weeks, the data on coffee exports by countries and coffee imports in the US in October will be released (12/06), which may give a clue about the "health" of consumption in the country.

In December, the final USDA report will also be released, which should bring adjustments to the supply and demand balance in 2022/23, given reductions in production estimates by some major producers. However, the report may also bring adjustments for consumption since there is a prospect of a possibly weakened consumption due to macroeconomic problems in the countries, such as inflation and possible economic recession.

USDBRL appreciated on uncertainties in the Brazilian fiscal and political scenarios

The dollar advanced again last week in the Brazilian forex market, with the real/dollar pair ending the period at BRL 5.408, high by 0.6%, as agents were still reflecting the uncertainties surrounding the negotiations for the proposed constitutional amendment (PEC) for the Transition and the lack of definition about the body of ministers of the new government. Abroad, the dollar index ended the week at 106.0 points, down by 0.8%.

In a week marked by a lower volume of business in most global markets due to the absence of the American market during the Thanksgiving holiday, which interrupted stock exchange activities on Thursday (24) and a good part of Friday (25), the dollar maintained its downward trajectory against most global currencies. Investors continue to reflect the lower-than-expected inflationary data for October in the United States and the signaling by the American central bank that it should ease the pace of adjustments in the interest rate as of its next decision, raising it by only 0.50 p.p. in its next meeting, a smaller increase than the 0.75 p.p. observed in the last three decisions.

Accordingly, it will be important to follow the last speech of Fed Chairman Jerome Powell this week before the monetary policy decision on December 14, as well as if the main economic indicators released until then will continue to build a scenario of economic and inflationary deceleration. If the indicators confirm this perspective, the tendency would be to maintain the downward pressure on the American currency. In this sense, the highlights on this week's agenda are the release of the second revision of the third quarter GDP by the Bureau of Economic Analysis (BEA) on Wednesday (30), the November Industry PMI, to be published by the ISM Institute on Thursday (1), and the November Employment Situation report, released by the Bureau of Labor Statistics (BLS) on Friday (2).

In Brazil, the issues related to the Transition PEC and the definition of the ministers of Luiz Inácio Lula da Silva's administration, especially the Finance Minister, should continue to be a source of instability in the foreign exchange scenario. Furthermore, the lack of a conclusion about the final text of the PEC and about the future government's proposal to allocate the amount related to the Bolsa Família income transfer program (estimated at BRL 175 billion) outside the constitutional spending cap, raising investors' concern about the country's fiscal scenario, has been the main bullish factor for the exchange rate in recent weeks.

This week, the future president of the Republic returns to Brasília to personally deal with the strategies for the PEC approval and to follow the definition of officials of his administration. An eventual approval of the PEC with a deadline for Bolsa Família to remain outside the spending cap and a definition of a Finance Minister more in line with market expectations could relieve the recent USDBRL appreciation. In case of uncertainty prolongation, as well as the selection of a minister with less alignment to the liberal agenda – as the possibility of the former Minister of Education Fernando Haddad is rumored, it tends to increase instabilities and keep the USDBRL at higher levels.

INDICATORS

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

Coffee

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