Coffee Weekly Report

Once again, coffee prices ended the week with mixed results, with New York up slightly and London lower. Under the influence of the recovery of the Brazilian real, Arabica’s most active contract (May/22) ended Friday (25) quoted at US₵ 221.85/lb, an increase of 180 points (0.81%) over the previous Friday (18). In Brazil, contrary to New York, the Cepea's Arabica indicator ended the week in decline, falling BRL 21.03 (1.64%), quoted at BRL 1,257.06/bag; the retreat was the result of the dollar's fall of 5.4% in the week.

On the other hand, after having advanced in recent weeks, the Robusta coffee futures ended the week with losses. Robusta’s most active contract (May/22) advanced USD 19 (0.87%) to end the week at USD 2,148/t. However, Cepea's Robusta indicator dropped by 0.35% to end Friday's session (25) at BRL 767.02/bag.
 

With no major news in terms of fundamentals, the week was relatively quiet for movements on the New York and London exchanges. The coffee market remains under pressure due to the impacts and uncertainties linked to the armed conflict between Russia and Ukraine, as we have already discussed in previous issues of this report. The possible drop in global consumption, mainly driven by the countries involved, should continue as the main concern of the coffee market while the confrontation persists.  

In the next two weeks, attention should turn to the export data, especially in Brazil, which may indicate the first impacts of the war on coffee exports. Russia is the sixth-largest destination of Brazilian coffee exports and accounted for 233,600 bags in January and February 2022, an increase of 14.4% compared to 2021, according to the latest Cecafé report. The expectation is that March export data will already show the impacts of the war on Brazilian exports to the country. 

As mentioned in previous issues, despite this still uncertain scenario, other bullish factors are still present in the current context, with lower production in Brazil, the prospect of a tighter S&D balance sheet, excess rainfall in Colombia and the possibility of a La Niña scenario continuing in the coming months. 

Regarding estimates for Brazilian production, Dutch bank Rabobank recently updated its estimates for Brazilian coffee production in 2022/23. In its latest publication, the bank reduced its estimates for Brazilian production to 64.5 million bags, a 3% decrease from the previous estimate of 66.5 million bags - in the last update, Arabica production was estimated at 41.4 million bags and Robusta at 23.1 million bags. 

This is the third update for the bank's estimates, which had estimated production at 63.5 million bags in early November last year, then, in the same month, changed the estimate to 66.5 million bags. Despite the decrease, this is the highest estimate available on the market, with the lowest estimate belonging to Conab at 55.7 million bags. Therefore, the difference between the highest and lowest estimate is still 8.8 million bags, bringing uncertainties and greater volatility. StoneX estimates the Brazilian production at 58.9 million bags, 38.3 million bags of Arabica and 20.6 million bags of Robusta coffee. 
 

Source: StoneX. 

Over recent weeks, the advance in certified stocks has been an additional factor contributing to pressure on coffee prices in futures markets. From the middle of last year until February, certified stocks of Arabica coffee have fallen sharply, from around 2.2 million bags to less than 1 million bags in February. However, in recent weeks certified stocks have reversed their trend and are increasing - since the beginning of March, stocks have advanced by over 146,000 bags (14.7%). 

Arabica certified stocks (thousand bags)

Source: ICE. Design: StoneX.

The USD's sharp drop in the Brazilian exchange market contributed as an important factor to supporting coffee prices, mainly in New York, during the last week. The American currency fell for the fourth consecutive week, with the real/dollar pair registering a weekly variation of -5.4%, ending last Friday (25) at BRL 4.747. In the year, the currency has already accumulated a 14.8% drop against the BRL. On the other hand, the dollar index advanced 0.6% to end quoted at 98.8 points, reflecting the apprehension of agents with the effects of the war between Russia and Ukraine on global economies and the search for assets considered safe havens, which, in turn, tends to keep speculators away from betting on new highs for coffee.

Generally speaking, the fundamentals that have underpinned the strong appreciation of the Brazilian real in recent weeks remain in place. Some factors can explain the strengthening of the Brazilian currency in 2022: the significant rise in the prices of most commodities, especially after the beginning of the armed conflict in Eastern Europe, which has favored the country as a major exporter of primary products; being considered as a possible substitute for part of the products exported by Russia that will be interrupted to a large part of the advanced economies, both due to the sanctions imposed on the Kremlin and due to the Russian "retaliation" to countries considered hostile; having a relatively lower exposure to the impacts of the war; the high differentials of the Brazilian interest rate compared to that of the United States.

In this context, favored by the pricing of the shares of Brazilian companies as "cheap," both for being involved in sectors that have been driven by the items mentioned above (commodities and financial), B3 has already registered the largest net inflow of foreign currency in a quarter since 1994, the beginning of the historical series. B3 informed that until March 22, it had registered a net inflow of a little over BRL 81 billion.

Abroad, the agents should follow this week the release of reports regarding the country's labor market in March, with emphasis on the release on Friday (1) of the employment situation report by the Bureau of Labor Statistics (BLS). The report is expected to indicate a continued fall in the country’s unemployment rate. An indication of improvement in the country's labor market may give more room for the Fed to adopt a more hawkish stance, i.e., a more contractionary monetary policy stance, to combat the strong inflation in the country. Therefore, in practice, the American central bank would have more room to raise interest rates, which would increase bets that the Federal Open Market Committee (FOMC) may make a more aggressive adjustment in the basic rate at its next meeting, going from a 0.25% to 0.5% hike, which tends to increase the demand for the American currency, acting in a bullish manner for the dollar.

Among the indicators from Brazil, the agents should follow the release of the Central Bank of Brazil’s statistics for February, with emphasis on the statistics of the foreign sector. In addition, the indicators that can help analyze the effects of price hikes for the final consumer should receive attention with the publication of the General Price Index - Market (IGP-M) for March by the FGV and the Producer Price Index for February, which will be released by the IBGE, both on Wednesday (30).