Sep 2 / Laleska Moda

A volatile month for coffee: Arabica and Robusta hit 3-month highs in August

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  • Coffee market remained highly volatile in August, with significant fluctuations in Arabica and Robusta futures prices after the first week of the month. Nearest-term contracts for both varieties reached a three-month high in recent days, approaching levels seen in early May.

  • Prices have not only been supported by fundamentals, but by speculative buying, specially after the drop in arabica certified stocks in August, as US roasters are trying to secure supply after the 50% tariff on Brazilian beans. The CFTC report from Friday, August 29, showed a light increase in funs long positioning in August.

  •  A lower 25/26 Arabica crop in Brazil, and the development of the 26/27 season in the country and the 25/26 season in Vietnam also continue to bring volatility to prices.

  • In Vietnam, Typhoon Kajiki contributed to overall market instability in recent days. However, no impact was recorded in coffee-producing areas, which are currently in the final development stage of the 25/26 season.

  • In Brazil, the 26/27 season is in its development phase, with heightened attention on weather conditions. Unfavorable climatic developments pose a potential risk to the Arabica crop, which has already faced challenges in recent years. Brazilian farmers also continue holding back on sales as they wait for the major blooms of the 26/27 season.

A volatile month for coffee: Arabica and Robusta hit 3-month highs in August

Coffee prices kept highly volatile throughout August. After a slower period, future prices hiked in the past weeks, supported mainly by supply uncertainties and speculative buying. After touching the highs of 391 c/lb last Thursday, Arabica’s December/25 contract closed Friday, August 29, at 386.1 c/lb, up 33.7% in the month. Robusta’s November contract also had a significant valuation of 44.5% in the month, closing at 4,815 USD/mt Friday. Despite the drop this early September, prices are likely to continue volatile. Interesting, the arbitrage between Arabica and Robusta prices also increased in the month and now is in its highest levels since early 2022.

As mentioned in our previous analysis, concerns are growing over the short-term supply of Arabica coffee. Brazil's 25/26 crop is smaller than expected, and certified stocks of the variety are decreasing amid the ongoing 50% US tariff on Brazilian coffee beans. US roasters will likely secure supply from other origins, which currently have low stocks, as well as from certified stocks, providing short-term support for prices.

LN-Robusta (USD/mt), NY-Arabica and Arbitrage (c/lb)

Source: LSEG

Reflecting these concerns, the spread for near-term Arabica contracts has increased, particularly for the December/25 vs. March/26 contracts. The Robusta November/25 and January/26 spread also increased in August, despite a setback last week, reflecting near-term supply concerns. Despite the large production of this variety in Brazil and in Indonesia in the 25/26 season, Brazilian farmers still remain distant from the market, redirecting more sales to the domestic industry. Meanwhile, supplies in Indonesia are scarcer than at the beginning of the season.

Arabica: December/25 and March/26 spread (c/lb)

Source: LSEG

Robusta: November/25 and January/26 spread (USD/mt)

Source: LSEG

Meanwhile, the availability of Vietnam's Robusta remains low. In a recent development, some traders have been looking for Brazilian and Indonesian beans to fulfill their contracts. At the end of August, Typhoon Kajiki also hit the country. While the typhoon hopefully did not damage coffee-growing regions, it contributed to market instability last month as Vietnam is currently in the 25/26 season development phase. Additionally, demand for Robusta could increase in the coming months due to current arbitrage levels and fears of an Arabica shortage. As previously mentioned, Arabica certified stock has dropped amid a lack of selling interest from Brazilian farmers while most other origins are in their off-season.

These fundamentals also prompted speculative buying last week. Arabica funds increased their net long positions, and Robusta speculative funds went from net short to net long positions in the latest COT report, which also contributed to the price hike. As we head into the development of the 26/27 season in Brazil, we may see more activity from funds in the coming weeks depending on the country's weather forecast, as unfavorable climatic developments pose a potential risk to the 26/27 cycle.

CFTC: Arabica Speculative Net Funds Position (lots)

Source: CFTC

ICE: Robusta Speculative Net Funds Position (lots)

Source: ICE

Over the next two weeks, dry conditions with below-average rainfall are expected in most Arabica coffee-producing regions in Brazil. Currently, a larger volume of rain is necessary to induce major blooms in Arabica areas for the 26/27 season. In Conilon areas, rainfall was recorded in Espírito Santo, and favorable weather is forecasted for the coming weeks. Higher rainfall in these regions will promote new blooms and is essential for setting flowers that have already opened.


Brazil Weather forecast for next 14 days – European Model (mm)

Source: World AG Weather

In Summary

The coffee market remained highly volatile throughout August, with Arabica and Robusta future prices returning to May levels by the end of the month. Prices are currently being supported by short-term supply worries and speculative buying, especially after the drop in certified Arabica stocks amid the 50% US tariffs on Brazilian beans. Most other origins are in their off-season with limited offerings, while Brazilian farmers remain distant from the market as they await the blossoming of the 26/27 Arabica season. The weather in the country remains dry, and increased rainfall is necessary to open the flower. In the coming weeks, the market should pay close attention not only to weather conditions in Brazil but also in Vietnam, Central America, and Colombia, as the 25/26 season is still developing in these regions.

Weekly Report — Coffee

Written by Laleska Moda

laleska.moda@hedgepointglobal.com

Reviewed by Luiz Silverio
luiz.silverio@hedgepointglobal.com
www.hedgepointglobal.com

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