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CoffeeNetwork Revises Estimates for 22-23 Global Demand, Sees Surplus for 23-24

By: CommodityNetwork Team - USA, CommodityNetwork USA

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CoffeeNetwork Revises Estimates for 22-23 Global Demand, Sees Surplus for 23-24
 
Alexis Rubinstein
Managing Editor
alexis.rubinstein@stonex.com
In this report, we will combine data from various sources along with our own credible analysis to deliver ranges for production and demand forecasts for the October 2023 to September 2024 crop year, which we think are most reasonable for today’s climate.
Production
For Brazil, in November 2022, the StoneX team visited coffee producing regions of Rondônia, south of Bahia and Espírito Santo. In the second half of the trip, in February 2023, they visited the areas in the Cerrado, southern Minas Gerais, Mogiana and Matas de Minas. Based on the findings, Brazil’s 2023-2024 coffee crop is estimated around 62.3 million bags. This figure was used in our global production calculation.
For the other major producers, we will see the impact from both the presence of La Niña and the transition to El Niño on coffee crops. 
For the world’s second largest producer, Vietnam, production should increase slightly from last year from 30 million bags to 31.2 million bags. The expectation is that rainfall will remain plentiful in the coming months and temperatures should hover in the average range providing beneficial conditions for the development of the crop. Additionally, improving yields could lead to a larger crop. 
Indonesia was significantly impacted by La Niña-induced excessive rainfall, which cut production by an expected 2 million bags. With the main harvesting of the crop beginning this month, fortunately, the 2023-2024 crop will avoid any further damage by El Niño related weather. 
Expectations of strong droughts in Colombia later this year have led some of the country's coffee growers and exporters to cut their production estimates for 2023-2024. The El Niño weather phenomena is producing high temperatures across the country, and the tendency is expected to worsen into June onwards when it will begin to consolidate. The country will face these El Niño conditions after experiencing La Niña for three consecutive years, causing torrential rains. CoffeeNetwork estimates that production in Colombia for 2023-2024 could fall to 11 million bags, down from the 13 million bags produced in the previous coffee year. 
The impact of El Niño on Latin American coffee producing regions is generally a delay in the onset of seasonal rains, followed by either erratic or below average precipitation, which could cause uneven or delayed flowering. Colombia experiences flowering from February-March, whereas in Central America, flowering occurs in April-May. 
image 73805
Chart 1: Impact of El Niño (November to February), source: StoneX and NOAA
image 73806
Chart 2: Likelihood of El Niño, source: NOAA
Taking into account our forecasts for each individual country, CoffeeNetwork sees global production for the 2023-2024 coffee year at 171 to 173 million bags. This represents an increase of 0.6% to 1.8% from the previous crop year when CoffeeNetwork estimated production between 170 and 172 million bags. 
Consumption

2022-2023 Revisions

We know…we sound like a broken record. But we have said it before and we will say it again – it is an unnecessarily massive challenge to try and calculate global coffee demand. There continues to be major voids in data and specific information needed to accurately assess the situation. And even in the areas where the data isn’t lacking, it’s far from transparent, and credibility and accuracy are almost always questioned.
But, we are not afraid to admit when we were wrong. And admittedly, we may have been too optimistic about global coffee consumption for the 2022-2023 crop year. In our last forecast in June 2022, we projected that demand for the October 2022 to September 2023 crop year would range between 164 to 165 million bags, representing a 0.5% to 1% increase year on year. However, as the time period progressed, we saw data pointing to slower demand globally, which prompted us to revise our estimates.
CoffeeNetwork now sees global coffee demand falling by 1% from the 2021-2022 crop year to the 2022-2023 crop year. Therefore, demand for 22-23 is now pegged at 162.36 to 163.35 million bags. 
Why the Revision?
First, we took a look at differentials, which generally reflect origin-specific demand/supply outlooks. Within the last few weeks, about 8 months into the 2022-2023 crop year, we have seen differentials begin to collapse. The cause of the weakening differentials is lower demand from importers. Brazil, for example, started the beginning of the year with a premium of FOB +16 and was last seen at -9 for SW NY 2/3 FC 14/16 in South of Minas (a semi-washed coffee with similar quality to what the Exchange would certify). 
image 73812
Chart 3: Brazilian Arabica Coffee Differentials 
It is important to note, however, that while weakening differentials confirm lower demand from importers; lower demand from importers does not necessarily equate to lower global consumption. We are currently in the midst of a backwardation, meaning it is not favorable to carry over stocks. This, in addition to the high interest rate, makes the carryover even more expensive, making it financially unattractive to buy new coffee at the moment. So, it is entirely possible that the weakening differentials are a result of importers just drawing down their stocks, but, unfortunately, we don’t have reliable stock data to confirm nor deny this theory.
The Green Coffee Association stopped publishing reports on coffee stocks in the US as of April 2023, leaving only 6 months of data for the October 2022 to September 2023 crop year. What we can tell from those 6 months, however, is that stocks only fell 4.8%, or 303,885 bags, over the period. This drawdown in stocks does not infer strong demand.  
image 73807
Chart 4: Green Coffee Stocks in the US, source: GCA
Fortunately, data from global exports and imports are both widely reported and generally accurate, and therefore, can be used efficiently as evidence to lower demand. Official data from Brazil’s Coffee Exporters Association, CeCafe, showed that coffee exports as of May 2023 were down 21.5% year on year. With two consecutive years of healthy crops, it is more likely that lower exports are a result of slowed demand as opposed to a lack of supply. 
image 73809
Chart 5: Green Coffee Exports from Brazil, source: CeCafe
Imports for the EU and US were also lower than average. Coffee imports to the US have been steadily declining since the start of the crop year. Data from the USDA shows that US coffee imports are currently down 11.4% from October 2022 to April 2023. European coffee imports have followed a similar pattern, with the latest Eurostat data showing EU coffee imports down 8% since the start of the crop year. 
image 73810
Chart 6: Coffee imports to the US and EU, source: USDA and Eurostat
Another window into consumption is to look at the financial results of the major international coffee companies. But one must look more closely than just total revenue, as raising prices was a common practice last year and helped compensate for losses derived from lower volume of sales. Farmer Brothers reported total revenue for the fiscal third quarter was $124.2 million, a slight increase year-over-year, but down on a quarter-over-quarter basis. “We are beginning to see increasing success selling through higher priced coffee as our recent price increases take hold across our broader customer base,” the company said. Starbucks saw global comparable store sales increased 11%, primarily driven by a 6% increase in comparable transactions and 4% increase in average ticket. Keurig Dr Pepper’s net sales for the first quarter 2023 decreased 1.3% to $931 million, compared to $943 million in the year-ago period.  This performance reflected higher net price realization of 5.3%, more than offset by a 6.6% decline in volume/mix.  For Nestle’s coffee portfolio, organic growth was 2.9%, with pricing of 4.0%. RIG (real internal growth) was -1.1%, mainly due to post-pandemic normalization. Reported sales in Nespresso decreased by 2.2% to CHF 1.6 billion. JDE Peets reported financial results for full year 2022, which showed total sales increased by 11.3% on an organic basis. Organic sales growth reflects a price effect of 15.8% and a volume/mix effect of -4.4%. 

Forecast for 2023-204

Looking ahead to the October 2023- September 2024 crop year, there is the potential for global coffee demand to rebound and resume the long-rooted trend of increasing year on year.

Unfortunately, our forecast for coffee consumption for the 2023-2024 period will not be confirmed by certain data that could be useful, most notably, stock figures. 
Green coffee stocks in Europe are reported by the European Coffee Federation, but only includes data for stocks in the ports of Antwerp, Hamburg, Le Havre, Barcelona, Trieste, Genoa, Napoli, Tallin, London, Felixstowe, and Bremen. This means that, according to Eurostat data, at least 7 of the EU’s busiest container ports are left off the dataset. 

Brazil’s stock figures are equally as elusive. CONAB, the USDA and Brazil’s IBGE all publish data on coffee stocks, all with hugely varying figures. Data from IBGE shows stocks went from 18.6 million bags at the end of 2021 to 14.6 million bags by the end 2022, down 21.5%. USDA shows Brazil’s ending stocks falling from 4.1 million bags to 2.7 million bags. 

As mentioned above, the market will no longer have access to data for green coffee stocks in the US from April 2023 onwards.  

So, with this information, or lack thereof, we must look to other statistics for a better insight into global demand.

One of the main factors into the slowed demand we have projected in 2022-2023 was the soaring cost of coffee. Inflation of coffee prices in main consuming regions deterred consumption as economic concerns lingered. However, the global economic outlook has shifted more positive for the next crop year. If inflation weakens, and interest rates fall, a recovery in consumption is imminent. According to the International Monetary Fund (IMF), “global growth will bottom out at 2.8 percent this year before rising modestly to 3.0 percent in 2024. Global inflation will decrease, although more slowly than initially anticipated, from 8.7 percent in 2022 to 7.0 percent this year and 4.9 percent in 2024.” The price of coffee in the US, Brazil and EU is also pointing towards deflation, according to the most recent data. Should this trend continue into the 2023-2024 crop year, lower coffee costs will correlate with demand recovery. 

image 73811
Chart 7: Coffee price inflation in Brazil, US and EU; source: IBGE, Commerce Department, Eurostat
We also expect coffee prices on the international market to come down after having spent the majority of the 2022-2023 crop year above $170/lb, closing the first session of the 2022-2023 crop year on October 3, 2022 at $215.35, the highest level seen thus far for the period. If Brazil’s winter season ends with no major frost events, the expectation of higher global production should be bearish for coffee. 
Based on this, we believe that global coffee demand will start its recovery and resume its upward trajectory, increasing 0.5% year on year. Our forecast for 2023-2024 coffee demand is therefore 163.17 to 164.17 million bags.
Balance Sheet Review

2023-2024

Production forecast *initial*

2023-2024 Consumption forecast *initial*

2023-2024 Surplus/Deficit *initial*

2022-2023 Production forecast *final*

2022-2023 Consumption forecast *final*

2022-2023 Surplus/Deficit *final*

 

171-173

 

163.17- 164.17

 

+6.83-9.83

 

170-172

 

162.36-163.35

 

+6.65-7.64

 

 

 

 
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