Coffee Weekly Report

With the macroeconomic scenario still playing an important role in the market oscillations, coffee futures ended the last week with mixed results. In New York, the prices gave back a good part of the strong gains of 1050 registered in the previous week and ended last Friday (5) with the most active contract (Sep/22) quoted at US₵ 209.45/lb, a weekly drop of 775 points (3.6%). Despite the significant drop, the week was volatile, with coffee even seeking a positive week until Thursday, when it closed at US₵ 219.3/lb. The bullish movement was driven by concerns over declines in certified stocks, dry weather in producing areas, and indications of a possible frost in the coffee belt in August in some weather forecast models. However, on Friday (5), a recovery in the dollar index and the predominance of the general search for less risky assets by investors pressured Arabica prices, which marked a daily drop of 985 points (-4.5%). 
 
In London, the Robusta prices increased by 0.7%, with the most active contract (November) closing the week at USD 2042/t. In the London terminal, price movements were volatile, supported by the decrease in Robusta's certified stocks and reductions in Vietnamese exports. 

Since mid-May, Robusta's certified stocks have been on a positive trajectory amidst certified coffee from Vietnam and Indonesia. However, since mid-July, certified stocks of the type have been falling, following a similar path for Vietnamese exports. In July, while Vietnam's coffee exports fell by 17% to 1.89 million bags, certified stocks fell by over 72 thousand bags (4%). It is important to mention that even with the harvest underway in the Indonesian regions of South Sumatra and Java Island, Vietnam, the world's largest coffee producer, is still in its off-season period, with the next harvest scheduled to begin in the second half of November. 
 

WEEKLY INTRADAY (MOST ACTIVE CONTRACT) - August 01 to 08

Following the trend observed in the international market, the week was quite volatile for prices, with the prices of Arabica coffee in the Brazilian domestic market ending the week lower. Cepea’s Arabica indicator ended the week at BRL 1,261.57/bag, a decrease of 3.0%. On the other hand, Cepea’s Robusta indicator ended higher by 0.5% to close at BRL 719.22/bag. 

While issues related to global demand remain under great uncertainty and present greater difficulties to be monitored frequently, the agents followed the signs of lower availability of mild coffee in the market during the week. In addition to the drop in certified stocks, a supporting factor in recent weeks, significantly weaker export data in Colombia and Honduras highlights the lower supply of higher quality standards coffees. Data from the Colombian Coffee Growers Federation (FNC) showed that production in July totaled 944,000 bags, a significant drop of 22.0% from the 1.209 million bags recorded in the same month last year. In cumulative terms, Honduras has produced 6.372 million bags in the first seven months of the year, 8.0% below last year (6.9 million) and 15.5% below the average of the last five years (7.5 million).
 

Colombia's coffee acumulated production (million bags)

Source: FNC. Desiogn: StoneX.

Difficulties due to adverse weather faced by Colombian coffee growers have also impacted production in Honduras. According to the Honduran Coffee Institute (Ihcafe), exports from the fifth largest global coffee producer accounted for 409,000 bags in July, down 38.1% compared to the same month in 2021. According to the Institute, the lower shipments reflect the weaker production that, in the case of Honduras, has been affected by rust. 

This week, besides the attention of agents continuing on macroeconomic and exchange rate factors, certified stocks and weather in Brazil, the market will keep an eye on Brazilian export data, which should be released in the coming days.

Since the pandemic's beginning and more recently, much has been said about the possible impacts of macroeconomic factors on coffee consumption. Although it has proven to be quite resilient and inelastic, a possible drop in demand for the beverage has started to be emphasized in market analyses, given the unique conditions of the current pandemic, economic crisis, and war scenario. Therefore, to study the issues related to consumption, besides the follow-up of stocks, exports and imports, it is necessary to follow the financial results of the companies linked to the sector. 

Recently, JDE Peets' financial results for the first half of 2022 were released, which indicated a 19.7% increase in sales revenues to a total of 3.896 billion euros. Furthermore, Keurig Dr Pepper, a company also active in the coffee sector, indicated a 13.2% increase in total sales revenues in the year's second quarter, to a total of $3.55 billion. Also, according to Keurig Dr Pepper, sales revenues of the company's coffee-related products (Coffee Systems) had an 8.5% increase to $1.2 billion. 

Data released last week by the USDA indicated that coffee imports in June totaled 2.155 million bags, an increase of 18% compared to the previous month and 5% compared to June 2021. Considering the cumulative volume, the US imported 12.3 million bags in 2022, an increase of 6.5% compared to last year. 

US coffee imports seazonality (million bags)

Source: USDA. Design: StoneX.

One of the factors that caused concern among investors was the heightened tensions between the United States and China following the visit of the Speaker of the US House of Representatives, Nancy Pelosi, to Taiwan. This was the first visit by a high-ranking member of the US government since 1997. The two largest global economic powers differ in their opinions regarding the island as Beijing does not recognize Taiwan's independence, considering it part of Chinese territory, while Washington defends the island's autonomy as a democracy. In this context, Pelosi's visit resulted in demonstrations by Chinese officials, accusing them of disrespect, in the breakdown of diplomatic talks between the United States and China on issues such as climate and security, and led the Chinese government to promote several military exercises around the island, using warships and warplanes and using live ammunition. The more stressed environment in the region, at an already extremely delicate moment in global geopolitics, contributed to raising the apprehension of global agents.

At the end of the week, figures from the July Employment Situation Report in the United States, released by the Bureau of Labor Statistics (BLS), surprised positively. The net creation of 528,000 new jobs, more than double the 250,000 projected by analysts, indicated that, at least momentarily, the labor market in the country continues to expand. The result endorses the statements made by members of the Federal Reserve throughout the week, which reinforced that the American central bank should continue with a firm stance in fighting inflation. Thus, bets increased again that the monetary authority may carry out its third consecutive 75 basis point increase at its meeting in September, which raised the demand for dollar-denominated investments and favored the American currency.

In Brazil, the highlight was the decision of the Central Bank’s Monetary Policy Committee (Copom) on Wednesday to raise the basic interest rate (Selic) by 50 basis points to 13.75% p.a. Although already expected, the increase was one of the main factors responsible for the recovery of the Brazilian currency in the last two trading sessions of the week. However, despite the Committee informing in the communiqué that it "will assess the need for a residual adjustment, of a smaller magnitude, at its next meeting," suggesting a 25-point increase, it was unclear the points and possibilities that could alter the monetary authority's guidelines until the end of 2022. In this context, the market should reflect on Tuesday the release of the minutes of the Copom meeting in search of new clues as to how the Central Bank has evaluated possible scenarios for its next decisions.

Tuesday is the main day on the Brazilian agenda, which besides the Copom minutes, will include the release of the July National Broad Consumer Price Index (IPCA). The median of market expectations projects a retraction of 0.65%, with the accumulated figure over 12 months dropping from 11.89% to just over 10.1%. Agents should also follow the Monthly Survey of Trade (PMC) and the Monthly Survey of Services (PMS) for June, which will help to evaluate the level of activity in the Brazilian economy.

In the foreign scenario, the release of the Consumer Price Index (CPI) and the Producer Price Index (PPI) for July on Wednesday (10) and Thursday (11), respectively, are noteworthy. Analysts' projections point to a slight slowdown in both.
 

Sources: ICE/NY; ICE/EU; B3; Commodity Network Trader’s Pro.