Coffee Weekly Report

Coffee prices appreciated again significantly in the last week on the major exchanges, continuing the trend observed in recent weeks. Several fundamentals, such as concerns about short-term global coffee supplies and the upcoming Brazilian crop, weather issues, and technical factors, continue to drive coffee prices higher. 

Arabica most active contract on the New York exchange (March/22) showed a weekly appreciation of 955 points (4.09%) to end Friday (26) quoted at US₵ 242.95/lb, after reaching its highest level in almost ten years. In Brazil, the CEPEA indicator for Arabica coffee recorded an increase of 4.63%, about BRL 64.6/bag to close Friday (26), quoted at BRL 1457.25/bag, a historical high for the index.

Without major news regarding the fundamentals, the market was supported by the negative supply and demand balance for this crop year associated with the expectation of a lower production next year, which has been the main long-term fundamental supporting coffee prices. Furthermore, the market reflects global logistical problems, which have limited short-term supply, and climate issues linked to the La Niña occurrence, which creates the risk of worsening the global deficit scenario.

In Brazil, the entire coffee belt received significant amounts of rainfall, with some receiving above-average rainfall for the period. In general, except for the state of São Paulo, the Cerrado region of Minas Gerais and Southern Bahia, the entire belt has received above-average rainfall, with accumulated rainfall between 350 and 550 mm over the last 60 days. The scenario should remain favorable for the next 14 days, with the forecast models indicating accumulations around 100 mm for most of the producing regions.

Source:  StoneX, with NOAA/NCEP/EMC (GFS: Global Forecast System), 2021.

Over the next few weeks, several reports with November country exports will be released, with Brazil, Vietnam, and Colombia being the most important. The reports will provide important information regarding the pace of exports and the condition of the global logistical crisis. In addition, the market will keep an eye on the harvest in Vietnam, the weather in Brazil and the producing countries and reflect technical factors, as long as no new fundamentals emerge.

On the demand side, the surge in Covid-19 infections, especially in Europe, deserves some attention. In recent weeks, some of the major global coffee consumers have seen a rise in the number of cases, with Germany, the largest coffee consumer on the continent, posting a record number of daily new infections since the start of the pandemic. The situation has prompted both Germany and countries in the region to re-adopt some restrictive measures. In addition, in the coming days, news from late last week regarding a new Covid-19 variant discovered in South Africa, called the Omicron variant, may inspire some caution and limit price increases. While there is still no conclusive information about the potential harm of the new variant, countries such as Italy, Germany, the UK, Belgium, and the Czech Republic have confirmed cases with the variant, raising the risk of an eventual re-adoption of tighter restrictive measures and reduced movement of people in restaurants, bars, and coffee shops.

ROBUSTA COFFEE PRICES appreciate

The Robusta January contract posted W/W gains of 2.8% as of last Friday amid the strength in the Arabica complex following on from a significant drawdown in the Arabica certified stockpile with a total decline of 174,324 bags. The Robusta stockpile also continues to see drawdowns with approximately 1.82M bags reported on Friday, amid the lowest levels since October 2020. The decline reflected the ongoing difficulty in sourcing Arabica from origin amid a mixture of bullish fundamentals surrounding the Arabica market. This includes reports of defaults on forward sales in Brazil as well as other major exporters such as Colombia. Furthermore, the market continues to work around the issues in sourcing containers and vessels to ship coffee around the world, and although shipping rates have been on a downward trend in recent sessions, freight rates remain very high. Despite this, the Baltic Dry Index has fallen to its weakest levels since mid-June of this year. From a technical perspective the January contract has moved in a steady upward trend over the course of the past month, reverberating between the upper Bollinger band and its 20-day MA.

As of last week’s settlement, Jan settled marginally below the upper band and moving into this morning’s open it remains below that indicator. The 14-day RSI remains around 8 points below overbought conditions suggesting room for further technical upside. The sharp drop in the dollar coupled with overriding bullish sentiment in the coffee market would suggest supportive factors remain in place moving into this week, contrasting to the wider selloff that occurred on Friday last week, driven by heightened concerns over the discovery of a new COVID variant reported to be “of-concern” which drove the sharp selloff on Friday that hit the wider markets. The World Health Organisation stated on Sunday that initial cases have shown just “mild” symptoms. Moving into this morning January starts 0.9% higher @ $2,328/t, up by 0.9% at the time of writing. 

Robusta November w. Bollinger Bands

Source: Bloomberg. Design: StoneX.

The Vietnamese General Statistics Office estimated November coffee exports at 78Kt (1.3M bags), down 6.9% Y/Y. This follows on from Customs data which showed October exports at 99,249t (1.65M bags). This would indicate a 1.2% increase in the cumulative shipment pace for 2021/22, although finalised Customs data for November is yet to be released and may show different numbers from that of the GSO. The harvest continues to progress although rainfall continues to cause issues in terms of delays with weather models showing above average rainfall expected for November and December on a delayed end to the rainy season. While delays will provide price support, one must not discount the larger volumes of coffee available in Vietnam at this stage of the year due to reduced exports and logistical issues that have resulted in larger stockpiles.

Robusta 2nd Continuation Candlestick

Source: Bloomberg. Design: StoneX.

 

Despite the generally bullish fundamentals for the American dollar in the international market, the US currency fell by 0.3% last week against the Brazilian real. The real/dollar pair closed at BRL 5.596. In the absence of major news regarding the coffee market fundamentals, the exchange rate decrease contributed to the continuity of the commodity's upward trend for another week.

Meanwhile, the dollar index showed a slight weekly advance of 0.1%, remaining above 96 points, the highest level since July 2020. Among the main factors that have led to the indicator's appreciation in recent weeks, the better-than-expected sectorial performance and labor market figures in the United States have indicated that the world's largest economy may be approaching the "substantive progress" targeted by the Federal Reserve. Last Wednesday (24), the US Bureau of Labor Statistics (BLS) revealed 199,000 new claims for unemployment benefits in the country, the lowest number since 1969 when 197,000 claims were made. The significantly lower-than-expected result reinforces a scenario of heated demand and economic recovery. However, it also hints that inflation may continue at high levels.

Also, on Wednesday, the minutes of the latest meeting of the Fed's Federal Open Market Committee (FOMC) revealed that the members of the collegiate were open to both accelerating the reduction of the asset purchase program and raising interest rates more quickly next year, should the acceleration in prices remain strong. The expectation that the contractionary cycle of the American central bank may occur in a more intense way than anticipated, reducing the availability of dollars in the market and increasing the remuneration of American treasury bonds (through higher interest rates), tends to be unfavorable to the flow of USD in the Brazilian exchange market, acting in a bullish manner for the exchange rate.

This week, besides a series of important indicators both in Brazil and abroad, investors should await with some caution new information about the Covid-19 Omicron variant detected in South Africa, which provoked strong risk aversion in global markets last Friday. Due to the large number of mutations observed, the WHO has classified the variant as "of concern," the same group as other variants that have shown a high degree of transmission or reinfection, such as Delta. Moreover, the event occurs in a scenario of a strong increase in the number of Covid-19 cases in Europe, which has led to concern in the continent.
In Brazil, the agents must follow the voting of the PEC of judiciary bonds by the Senates' Commission on Constitution, Justice and Citizenship (CCJC) postponed to this Tuesday (30) after senators requested more time to analyze the changes defined last week. An approval, with forwarding for voting in the Senate plenary, would indicate a victory for the government and an approaching conclusion of the proposal, considered one of the government's top priorities for this year, which could calm investors' spirits give some respite to the Brazilian currency. 
 

Among the main indicators, the market should reflect the General Price Index - Market (IGP-M) for November, released by the FGV on Monday and the income and employment data for September and the third quarter, to be released by the IBGE on Tuesday (30). 
 On Thursday (2), the IBGE is expected to release the result for the Q3 GDP, with expectations that the indicator may show a result of a slight contraction in the period.
Abroad, IHS Markit will release the November PMIs for the major economies in the world. In addition, the BLS will reveal on Friday (3) the November Employment Situation Report for the United States, with expectations that the result will be close to the 531,000 new job openings seen in October, reinforcing the understanding of consistent recovery in the American labor market. Follow below the schedule with all the main economic indicators for the week.