By: StoneX Intelligence Brazil, StoneX Intelligence Brazil
• Arabica prices dropped by 660 points (4.2%) in NY, ending the week at US₵ 151.70/lb.
• Robusta coffee prices increased by USD 91/t in London (5.0%) to USD 1916/t.
• Cepea's Arabica indicator ended the week down by 7.6%, quoted at BRL 945.34/bag.
• According to Cepea, Robusta prices decreased by 2,9%, ending the week at BRL 672,68 / bag.
• Vietnam may limit Robusta's supply to the foreign market in the short term. ▲
• Rainfall forecast through the end of January continues to fuel sentiment for a great crop. ▼
• Weak La Niña could linger to March. Chances of El Niño in the second-semester decrease. ▼
• Cumulative US consumer coffee inflation ends in 2022 at 27%. ▼
• GCA to release December stocks at US ports.
• Conab will release its first estimates for the 2023/24 crop.
• Funds sharply widen short position in New York.▼
▼ Bearish factors ▲ Bullish factors
Still pressured by the feeling that the 2023/24 crop can achieve a major recovery, with rainfall forecasts in the coffee belt by the end of January, strong speculators' movement and doubts about consumption, Arabica coffee futures contracts ended lower for the third consecutive week.
In New York, the most active contract (Mar/23) started the week with significant depreciation, when it reached a weekly drop of more than 10.0%, when it reached a low of US¢ 142.05/lb intraday on Wednesday (11), before recovering in the following two sessions to end Friday (13) quoted at US¢ 158.50/lb, a change of 4.2% compared to the previous Friday. In the last three weeks, Arabica coffee has shown a drop of 2,030 points (11.80%).
In London, Robusta coffee contracts followed the appreciation pace at the beginning of 2023, with the most active contract (Mar/23) marking an appreciation of 5.0% to USD 1825/t. The market has seen a shortening of the variety's supply in the short term, with producers holding onto their coffee more and reducing sales while waiting for more attractive prices.
Weekly intraday (most active contract) - Jan 02 to 06
Generally, it tends to observe more sales of Vietnamese producers in January, seeking higher remuneration for the festive celebration of the Lunar New Year, the country's main commemorative date, which will begin on January 22. However, due to significantly low prices in the Vietnamese physical market, producers have resisted doing big deals, even with the holiday's proximity. It is worth mentioning that during the celebrations, the Robusta market should lose a lot of liquidity, which, together with the few negotiations at the beginning of the year, can act in a bullish way to the quotes on the stock exchange.
In the physical market, both varieties have retreated. Cepea's Arabica indicator registered a strong drop of 7,6%, further pressured by the 2,5% devaluation of the dollar against the Brazilian currency, ending quoted at BRL 945.34/bag, the lowest weekly close since November. The indicator for Robusta, which had shown greater price resistance due to stronger domestic demand for the variety, fell 2.9% to end at BRL 672.68/bag.
As we have highlighted since the last quarter of 2022, the rainfall in Brazil, which has shown good volumes and remained continuous in the coffee belt since mid-October, continues to fuel market sentiment for a strong crop. As new estimates from market participants pointing to the same prospect of an abundant harvest continue to be released, prices may continue to hold at lower levels. On Thursday (19), agents are expected to react to Conab's first estimate for the Brazilian 2023/24 crop.
Additionally, NOAA's latest ENSO probability forecast raised the chances of La Niña holding through March but lowered the outlook for El Niño for the second half of the year. Since the weak intensity of La Niña has not negatively impacted the rainfall regime in Brazil in recent months, it seems unlikely that this trend will reverse at the beginning of the year, with the phenomenon nearing its end. Regarding El Niño, this should continue as a point of attention and may impact expectations for the flowering of the 2024/25 crop.
El Niño/La Niña Probability Forecast
Doubts about the possible negative impacts on demand continue to hang over traders' sentiment, limiting attempts at a more significant price recovery. Last week, the US Bureau of Labor Statistics (BLS) released the Consumer Price Index (CPI) for December, confirming a 0.1% drop in the month, with the 12-month cumulative rising from 7.1% in November to end 2022 at 6.5%.
While the aggregate result sparked optimism about cooling inflation in the country and raised market bets on lighter adjustments in upcoming interest rate decisions by the Fed, coffee inflation in the world's largest consumer has yet to consolidate a pullback.
The December result showed that roasted and ground coffee traded in the United States retail advanced 1,7% in December, after having retreated 0,8% in November. If, on the one hand, this was the least intense among the months in which it registered progress in 2022, on the other hand, it shows that consumer coffee could not obtain two consecutive months in reduction. With the year ending with cumulative inflation at almost 27.0%, the coffee market may face challenges to maintaining growth or at least the stability of US consumption.
Evolution of inflation on roasted and ground coffee in the US in 2022
The CFTC's latest Commitment of Traders (COT) report revealed that spec funds had a large stake in price fluctuations between January 3 and 10. In this period, the specs reduced their long positions in futures and options by 3,451 lots while increasing their short positions by 16,598. Accordingly, the fund balance went from -14.472 to -31.070, the most negative net position since November 2019. During the period, quotes decreased by 1,540 points, going from US¢ 166.30/lb on January 3 to US¢ 150.90/lb on 10. The significant increase of 28,759 open contracts was also notable, demonstrating an entry of more participants in the market and what is usually associated with a trend confirmation (bearish, in this case) in the sentiment of market participants.
Spec funds position in futures and options on the New York Stock Exchange
However, it is important to note that while this move signals bearish trend confirmation, it is also subject to more abrupt reversals in case of a strongly bullish fundamental. However, from what has been observed so far, there is no prospect of major reversals in the current scenario in the short term.
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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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