Coffee Weekly Report

Without much news on the fundamentals side and under the influence of technical and macroeconomic factors, coffee prices ended the week with mixed results, with New York rising and London showing a slight decline. The recovery of the Brazilian currency contributed to the advance of prices in New York, where Arabica’s most active contract (May/22) ended Friday (1) at US₵ 228.40 /lb, an increase of 655 points (2.95%) over the previous Friday (25). In Brazil, contrary to New York, the Cepea’s Arabica indicator ended the week lower, with a decline of BRL 11.74 (0.93%), at BRL 1,245.32/bag, the retreat was the result of the drop in the dollar of 1.7% in the week.

On the other hand, the Robusta coffee futures ended the week with slight losses. Robusta's most active contract (May/22) retreated USD 9 (0.4%) to close the week quoted at USD 2139/ton. On the other hand, Cepea’s Robusta indicator showed an important advance of 5.3% and ended Friday (1) at BRL 807.75/bag.
 

With a virtually unchanged scenario in terms of fundamentals, the coffee market continued to be impacted by macroeconomic and technical factors. As presented, the Arabica coffee market in New York was supported by the recovery of the Brazilian currency and the dollar decline in the domestic market. In addition, the market still feels the impacts caused by the war between Russia and Ukraine, as already presented in other editions of this report. 

As for the Arabica coffee market, the differentials in Brazilian markets have been significantly strengthened to the New York reference exchange. The increase in differentials was mainly due to the sharp drop in the dollar in the Brazilian market. In addition, the retreat of the highs of the year in New York amid the impacts of war contributed to this movement - the differential of coffee type 6 between Sao Paulo and New York was US₵ -30 /lb mid-February to US₵ -25 /lb last week. 
 

Source: ICE, CEPEA. Design: StoneX.

Concerning Robusta, it is worth mentioning that the estimates of exports from Vietnam released by the General Statistics Office (GSO) indicated an increase of 0.2% in exports in March, which totaled 2.83 million bags, compared to the same month last year. The year-to-date total for the crop year (Oct-Mar) was 12.91 million bags, increasing 1.41%. 

The increase in exports of Robusta coffee from Vietnam comes amid a sharp drop in Brazilian exports of the type, as a reflection of the differential condition. Due to the tight supply of coffee in Brazil and the high prices of Arabica coffee, the demand for Robusta coffee by industries has increased, resulting in positive differentials in the Brazilian domestic market; last week, the differential between the Cepea’s Robusta indicator and the London futures market reached values above BRL 750.00.
 

Preliminary data on the Brazilian trade balance for March, released by the Foreign Trade Secretariat (SECEX), indicate that Brazil exported 3.38 million bags in March, representing a 15.9% decrease compared to the same month last year when the country exported 4.02 million bags. The sharp decline in exports results from the lower availability of coffee amid reduced production in 2021/22 and logistical problems that continue to impact exports.

In the coming weeks, the coffee market should be impacted by movements in the macroeconomic and exchange rate fields – in case of a continued recovery of the Brazilian currency, prices in New York would tend to react positively, while the domestic market would continue to be pressured. Furthermore, due to the great uncertainties linked to the conflict between Russia and Ukraine, the coffee market and other commodities will continue to react to events linked to the war. 

The export data from Secex already indicate that the exports in March had a strong reduction.

In the next weeks, Cecafé will release official data for Brazilian exports, which tend to be in line with what was released by Secex. The reduced volume of exports in Brazil corroborates the perspective of lower supply, which, together with the logistical problems, brings a bullish tone to the market. 

In addition, the agents will follow closely the weather in producing countries and the release of the probability of maintenance of La Niña that will be published on April 14 by the US agency NOAA. The last update released by Australia BOM indicated that La Niña remains active, but the peak of the phenomenon has passed. Moreover, according to the agency, most of the seven international climate models point out that La Niña will lose strength in the next three months and will return to a neutral condition, most likely in late fall or early winter in the southern hemisphere. A confirmation of this scenario, with improved weather conditions in producing countries, can act to put pressure on prices on the exchanges.

Source: Australia's Bureau of Meteorology.

Acting as a supporting factor to boost the prices of coffee on the New York exchange again, the real/dollar pair ended the last week with a drop of 1.7% in the Brazilian exchange market, quoted at BRL 4.667. Thus, the American currency fell for the fifth consecutive week, accumulating a 16.3% retraction in the year. The dollar also fell slightly against a basket of currencies from advanced economies, with the dollar index dropping 0.2% to end last Friday (1) at 98.6 points.

The BRL has been strengthening since the beginning of the year due to several factors, such as the appreciation of commodities, the greater inflow of investors in the country in search of assets considered "cheap," and the increase in the differentials between Brazilian and American interest rates. Since the start of the Russian-Ukrainian war, due to the new wave of commodity appreciation, Brazil's relatively lower exposure to the effects of the conflict and the country's position as a possible substitute for primary products exported by Russia and Ukraine, the Brazilian currency has been gaining steam beyond expectations. With this, the real/dollar pair has retreated to levels significantly below the strong psychological resistance of BRL 5.00, something hardly imagined until the beginning of this year, when, amid the prospects of weak economic growth and uncertainties ahead of the presidential election, high volatility and high levels of exchange rate were expected.

It is worth remembering that, fundamentals aside, the dollar variations against the real, due to Brazil's large share in global production, tend to have an inverse correlation with coffee prices. This happens because, at times when the BRL is more devalued, prices become more attractive to Brazilian producers and exporters, who tend to look for more sales, expanding supply and putting pressure on prices. On the other hand, when the BRL strengthens, exports become less attractive, and commercial agents tend to "hold" coffee to wait for better opportunities, reducing supply and increasing prices.

Since mid-March, when the dollar started a round of consecutive falls of greater intensity, this correlation has taken on greater prominence and evidence in the market. Since March 15, when the real/dollar pair had registered a sequence of three consecutive highs, the American currency went from BRL 5.16 to BRL 4.66 by last Friday (1), a drop of 9.8% over 13 sessions, which marked ten daily drops and three highs. In this same period, the most active contract in New York went from US₵ 212.3 on March 15, when it reached its lows in 4 months, to advance 7.6% as of last Friday, a period in which it computed nine trading sessions of highs and 4 of lows.
 

Source: CommodityNetwork Traders’ Pro. Design: StoneX.

Accordingly, it is important to continue following the dollar depreciation against the Brazilian real, which should continue to have a bullish influence on coffee prices, which tend to prevail as long as there are no new news or significant changes in market fundamentals.

This week, the indicators agenda brings March Service and Consolidated PMIs for the main global economies and the release of the minutes of the last Fed's Monetary Policy Committee (FOMC) meeting, which should present more details regarding the debates of the members concerning a possible more intense rise in the basic interest rate and the plans to reduce the assets of the Fed's balance sheet as a way to fight the effects of inflation. In Brazil, the publication of economic indicators by the Central Bank remains uncertain due to the strike by the institution's servers, and the highlight goes to the National Broad Consumer Price Index (IPCA) for March, which the IBGE will release on Friday (8), and should show a strong increase in prices, especially due to the readjustments in fuel prices made by Petrobras on March 11.