Special | Coffee Market Outlook [may-july]

The beginning of 2022 was marked by great volatility in the coffee market. As the sentiment of a large deficit in the global S&D balance for the 2021/22 season, together with a likely tighter balance in 2022/23, was consolidated among market players, coffee prices began the year by extending the strong appreciation of 79.2% and 72.7% observed for Arabica and Robusta coffee, respectively, on their main exchanges in 2021. By mid-February, prices in New York (ICE) had advanced some 16% on the year to their 10-year highs, when the most active contract touched US₵ 258.45/lb on February 9. 

However, a market with mostly bullish factors at the time was once again subject to downward pressures during a period of heightened risk aversion following the outbreak of the Russian-Ukrainian war (February 24). Since the beginning of the armed conflict, coffee futures in NY showed a range of 3610 points, with the most active contract oscillating between a high of US₵ 247.55/lb and a low of US₵ 211.25/lb, to end the last month quoted at US₵ 222.1/lb, a devaluation of 10.3%. In London, prices showed a similar trend, with quotes retreating 5.7% from the beginning of the war until the end of April, going from USD 2234/t to USD 2107/t.

Arabica and Robusta coffee price trend

The war between Russia and Ukraine has brought new elements of uncertainty to the coffee market, which already has a major problem with the wide discrepancy between available supply and demand (S&D) estimates. Russia and Ukraine together account for about 3.3% of global coffee consumption, or just over 5 million bags, with most of this coffee going to Russian territory (4.2 million). 

Brazil is the second-largest exporter of coffee to Russia, having shipped 1.2 million bags to the country, second only to Vietnam. Due to the sanctions imposed by the countries on the Kremlin, the risk of defaults on payments, and the reputational risk, the average volume of Brazilian coffee shipments to the country should be largely impacted in 2022. According to Cecafé's most recent data, exports to Russia in March, the first full month after the beginning of the conflict, totaled 33,855 bags, a 72% decrease compared to February and 74% compared to March 2021.

Coffee exports to Russia (thousand bags)

Source: Cecafé. Design: StoneX.

Although the Vietnam General Statistics Office (GSO) does not break down destination countries in its monthly export data, Vietnamese shipments of Robusta coffee to Russia are also expected to be largely affected. In this context, despite the difficulties in estimating the size of the impact, a drop in global exports and consumption becomes likely, which would act to reduce a deficit or raise a surplus in the global balance sheet. Moreover, this trend should become increasingly stronger as long as the Russian-Ukrainian conflict persists, limiting the upward momentum in prices. As an additional factor, there is the risk that the economic consequences of the war, with the advance of inflation, loss of purchasing power among the population and a reduction in growth estimates in the main global coffee consuming countries, could damage consumption.

Before assessing the S&D balance, it is important to note that the discrepancy between estimates for Brazilian production and the global S&D balance is one of the biggest challenges in the coffee market and a major driver of volatility. For example, in 2021/22 alone, some estimates pointed to a deficit of 11 million bags and the USDA's a surplus of 2.6 million, resulting in a difference of almost 14 million bags between the highest and lowest estimate. Overall, the market sentiment is that the year 2021/22 does indeed have a very negative deficit, with the average of the estimates pointing to a deficit of 6.9 million bags, which has justified some of the price advances that have been observed in the second half of 2021 and early 2022. 

Range of estimates for the global coffee supply and demand balance (million bags)

Source: StoneX, USDA, ICO. Design: StoneX.

There are still many uncertainties for 2022/23, as production in many countries is still in the early stages of crop development. The number of estimates released is still small, and estimates from major agencies such as the USDA and ICO have not yet been released.

 As already mentioned, the size of the impact of the war between Russia and Ukraine on world coffee consumption is still very uncertain. However, taking into account only the estimates available, it can be seen that the market outlook is for a more balanced S&D balance in 2022/23, with the average of the estimates available so far indicating a surplus of around 1 million bags. The expectation of a more comfortable balance or slight surplus cools market concerns following a year with a very negative balance. For the next quarter, the market will keep an eye on the release of USDA estimates for countries' production, which should be released in May, and estimates for the global balance sheet, with the publication of the full report scheduled for the first half of June. 

One of the factors contributing to the increase in prices is the drop in certified stocks of Arabica coffee, which have fallen sharply since the second half of 2021. In September, stocks have fallen from around 2.2 million bags to lows below 1 million bags in February. The drop in certified stocks, which has a bullish bias for the market, is closely linked to differentials in origins and sea freight costs. The lower the differentials and the cheaper the shipping costs, the greater the possibility that coffees will be certified on the exchange. The drop in stocks presented above was due to the strengthening of differentials at origin, reflecting the lower production mainly in Brazil and the significant increase in freight costs, which discouraged the certification process.

ICE Arabica Certified Stocks (thousand bags)

Source: ICE – Intercontinental Exchange. Design: StoneX.

Since the end of February, stocks have increased slightly but have remained relatively stable at around 1.1 million bags, which has cooled agents' concerns around this issue. Moreover, some attention has been diverted to other issues, such as the war between Russia and Ukraine. However, monitoring certified stocks is essential since, despite the advances seen recently, conditions are not yet favorable for the certification of new coffees from origins. Even with the perspective of a larger production in Brazil in 2022/23, the scenario should not become favorable for certification in short/medium term, given the recent logistical problems and the high differentials at origins. 

From the massive crop of 2020 until the first quarter of 2021, Brazilian Robusta coffee has achieved a prominent position in shipments abroad after becoming the most competitive origin for the type. This condition resulted from the large production that year and the devaluation of the Brazilian currency, which could be seen in the level of differentials – the difference between prices in the Brazilian domestic market and the London market – which was below the main origins, such as Vietnam and Indonesia.

However, since the second half of 2021, this scenario has been reversed, with Robusta prices exceeding London prices from August onwards. The increase in prices in the domestic market reflected the strong increase in Arabica coffee prices in the Brazilian domestic market, which forced the industry to increase the use of Robusta in the blend. Since August of last year, the differentials advanced to USD 400/ton in September and October, fell back to close to 0 in January 2021, but increased again, reaching values above USD 800/ton in April. The main reflection of this scenario was the sharp reduction in Brazilian Robusta exports, while Vietnamese exports advanced, consolidating again as the most competitive origin in the current scenario.

Robusta coffee differentials by major origins (USD/ton)

Source: ICE, Traders Pro, Cepea, Bappebti, Giacaphe, StoneX. Design: StoneX.

For the coming months, the prospect is that the differentials of Robusta in Brazil will not remain at these levels after the entry of the new crop, which, according to several sources, should reach record volumes. The average available estimates point to a production of 20.9 million bags for the type, and StoneX estimates production at 20.6 million. However, estimates for Robusta have a difference of 6.4 million bags, ranging from 17 million (Conab) to volumes above 23 million, estimated by private organizations.

As always, Brazil, as the main global producer and exporter, will have the greatest weight in the definition of the global balance in 2022/23 and the market oscillations. Despite the concerns with production, the beginning of the 2022/23 crop harvest, which will start in mid-May and peak between June and July, should ease the market's concern with supply in short/medium term.

However, in the coming months, the weather should take center stage over price fluctuations, with market participants looking increasingly to the approaching winter in Brazil. After the severe damage caused by last year's frost, the fear that the winter of 2022 may cause further damage to the Brazilian Arabica coffee production should generate a lot of volatility in the market.

The constant analysis of La Niña/El Niño probability models and indications of their intensity will also be fundamental. The chances of La Niña continuing for the third year in a row should continue to be a source of concern. Colombia has been suffering serious difficulties because of the climate phenomenon, which has caused excessive rainfall in the country's producing areas in recent months and damaged local production. According to the National Federation of Coffee Growers (FNC), the country's production is expected to decline by more than 10% in the first half of this year. On the other hand, an extension of La Niña projections for the second and third quarters would increase the risks of delays and reduction in rainfall before flowering in the Brazilian harvest of 2022/23, affecting its potential. 

For demand, the signs that the Russian-Ukrainian war is far from an end, along with the economic ramifications of the conflict, such as the advancement of inflation and loss of purchasing power of the population, should keep agents on the alert regarding its negative impacts on consumption. Furthermore, the lockdown measures in important industrial cities and ports in China deserve attention, as they may, if prolonged for longer than expected, generate negative impacts on out-of-home consumption in the region and cause a return to the reestablishment of global logistics chains.