Coffee Weekly Report

StoneX released its outlook for the coffee market [May-July] last Thursday (05); access the full report here.

Arabica coffee prices started last week under pressure in New York, reacting to macroeconomic factors, such as the dollar appreciation. In addition, there was a strong selloff by the funds, which can be noted in the latest COT report showing that funds reduced positions by almost 8,500 contracts until Tuesday (10). 

As of Wednesday (11), the market reacted strongly to the forecast for falling temperatures in Brazil and the prospect of frost risk, advancing 1,610 points. The StoneX minimum temperature forecast report, which is based on the NOAA's GFS model, had already indicated, on May 10, the drop in minimum temperatures in Brazil between May 17 and 20. During the rest of the week, the market continued correcting Wednesday's high but keeping an eye on the forecast model's updates for minimum temperatures. 
 

Arabica’s most active contract (July/22) ended Friday (13) at US₵ 213.90/lb, posting an increase of 345 points (1.6%) compared to the previous Friday (06). Following the same trend, the Cepea’s Arabica indicator ended the week high by 1.2%, quoted at BRL 1,259.80/bag. 

For the Robusta market, despite the movements in New York, the prices reacted to forecasts of falling temperatures with an appreciation of USD 69/ton on Wednesday (11). Still, they ended the week lower, with Robusta's most active contract (July/22) falling USD 43 (2.0%) to end the week at USD 2,040. The Cepea's Robusta indicator closed 2.4% lower in Brazil, quoted at BRL 752.61/bag. As already mentioned in other editions of this report, the beginning of the Robusta harvest in Brazil increases its availability and puts pressure on prices.

This week, the approach of the polar mass in Brazil will be in the spotlight. The latest update of the GFS model shows that the cold front will hit the coffee-producing regions on May 18, 19 and 20. According to the forecast, some municipalities in the South of Minas, Mogiana and Paraná should face temperatures below 3°C, while some municipalities in the South of Minas Gerais face temperatures around 1°C. Some meteorologists argue that there is a risk of frost, but it will not be widespread as observed in 2021. 

Source: StoneX, with data provided by NCEP / GFS.

In any case, participants should closely monitor the advance of the cold front and its possible impacts on coffee crops. If the phenomenon does occur, the market trend tends to remain bullish, given that the occurrence could affect the development of crops and the 2023/24 crop. It is worth mentioning that it is still autumn, and the first polar mass is already approaching, which indicates the possibility of the approach of new cold waves, which should dictate the movements in the coming months. 

Brazilian green coffee exports (million bags)

Source: Cecafé. Design: StoneX.

As has already been mentioned in other editions of this report, the differentials of Robusta coffee prices, which are at high levels, discourage Robusta exports. The differentials reached USD 800/ton in mid-March. As anticipated, with the Robusta harvest progressing and its greater availability, the differentials have weakened in recent weeks, reaching USD 400/ton last week.

Another highlight was the sharp drop in exports to Russia in April, reinforcing the impacts of the war on Brazilian shipments. According to Cecafé's report, only 4,077 bags of coffee were sent to that country last month, a decrease of 95.4% from April last year and to the average of the last three years for the month, of about 90.6 thousand bags. The data also indicated that no soluble coffee bags were exported to the country, a category in which Moscow has the largest relative share of Brazilian shipments (9.4%) and is Brazil's second main trading partner with 378,000 bags imported in 2021, behind only the 704,000 imported by the United States. Last week, the Brazilian Soluble Coffee Industry Association (Abics) reported that Russia had stopped its soluble coffee purchases.
 

Brazilian coffee exports to Russia (thousand bags)

Source: Cecafé. Design: StoneX.

Suppose the war in Eastern Europe continues and coffee exports, in general, continue to be affected in similar proportions to April. In that case, the potential for a drop in total shipments from Brazil to Russia alone could reach more than 700,000 bags in the next seven months.

This Monday (16), the Green Coffee Association will release the report on coffee stocks at US ports for April. The last report showed an increase of almost 55,000 bags (0.95%) in March compared to the previous month. As can be seen in the seasonal graph of GCA stocks, there is a tendency for stocks to increase from March onwards. The seasonal pattern of GCA stocks reflects the higher import volumes of coffee from Central America, starting in March/April, and then the volumes coming from Colombia and Brazil in the second half of the year. Therefore, stock data may show substantial advances in April, which would act in a bearish manner for the coffee market. 
 

Seasonality of coffee stocks at US ports - GCA (million bags)

Source: GCA. Design: StoneX.

After appreciating for almost the entire week, the real/dollar pair retreated on Friday (13) to close with a weekly drop of 0.3%, quoted at BRL 5.058. Abroad, despite also retreating on Friday on a day of a slight reduction in global risk aversion, the dollar index showed a strong increase of 0.9% in the week, ending at 104.6 points, renewing its highest levels in nearly 20 years.

The appreciation of the American currency abroad has occurred due to the growing perception of a prolonged period of high inflation in global markets together with lower growth or, in certain economies, a possible retraction, which would characterize a situation of stagflation.
 

Last week, the Bureau of Labor Statistics (BLS) showed that the Consumer Price Index (CPI) in the United States increased by 0.3% in April, below that observed in March (1.2%) but above analysts' expectations (0.2%). Thus, despite the accumulated over the past 12 months dropping from 8.5% to 8.3%, the indicator was above the expected by the market (8.1%). In addition, the Core CPI, which disregards more volatile items such as food and energy, registered an increase of 0.6%, advancing against March (0.4%) and staying above expectations (0.3%). The increase in the core CPI suggests more widespread inflation in other consumption areas, such as services, which contributes to expectations that the Fed will maintain its firm stance in trying to control price advances in the economy.

In Brazil, the IBGE released that the National Consumer Price Index (IPCA) grew 1.06% last month, the highest increase for April since 1996, bringing the accumulated figure for the last 12 months to 12.13%. The main items contributing to the rise were food and beverages (2.06%) and transportation (1.91%). Furthermore, the prices increases in Brazil are also disseminated in several segments of products and services, with indications that they could remain high until next year, which may require the Central Bank of Brazil to continue adopting a more contractionary monetary policy for longer, with possible new advances in the country's basic interest rate.

Specifically for coffee, the IPCA showed a 2.50% increase in ground coffee prices in April. This was the lowest increase registered in 2022, after the increases in January (4.75%), February (2.51%), and March (2.87%).] With the result, the accumulated in 2022 reached 13.22%, and the accumulated in the past 12 months grew from 64.66% to 67.53%. With the interruption of the strong rise in prices of raw coffee in the domestic market, the next months tend to maintain a similar pattern to the one seen so far this year. As a result, the accumulated over the past 12 months for ground coffee for the Brazilian consumer should continue to grow at least until May, with greater chances of an interruption in the subsequent advances only from June, when the more intense increases recorded from June 2021 onwards will no longer be part of the series.

Evolution of inflation of roasted and ground coffee in Brazil in the last 12 months

Fonte: IBGE. Elaboração: StoneX.

Soluble coffee, in turn, registered an increase of 1.29% in its price to the Brazilian consumer, also the lowest value in the year after January (2.09%), February (1.81%), and March (2.53%). Thus, the accumulated rate in 2022 reached 7.94%, and the accumulated rate for the past 12 months went from 15.76% in March to 16.69% in April.

Everything indicates that the exchange rate scenario should be secondary this week for coffee since the weather in Brazil, fears about the possibility of frost in producing areas, and the inventory data in the United States, should be the main drivers for prices in the coming days.