Aug 25

Coffee Weekly Report - 2023 08 25

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  • As Brazil's harvest enters its final stages and El Niño continues to influence conditions, the focus remains on assessing potential impacts on the upcoming 24/25 Brazilian coffee crop.

  • The distinctive effects of El Niño on various coffee-producing regions are evident through temperature and precipitation variations.

  • Notably, regions like Zona da Mata and Espírito Santo are more susceptible due to experiencing higher temperatures and below-average rainfall levels.

  • Analyzing the Normalized Difference Vegetation Index (NDVI), a key measure of crop health, suggests a positive outlook for yields in the forthcoming crop; however, this metric's predictive accuracy is challenged by exceptional past yields driven by factors beyond NDVI (18/19, 20/21).

  • Upcoming weather becomes key in understanding 24/25’s potential: the rainfall forecast suggests that coffee areas will report rains well above normal from August 25 until the second week of September.

Unpacking El Niño's Impact on 24/25 Brazilian Crop

This week, coffee prices rebounded from the 145 c/lb level, as discussed in our previous report. Still, as the harvest reached its final stages in Brazil, and El Niño remains active, it’s vital to continue investigating the possible impacts that the phenomenon can have on the 24/25 Brazilian crop.

Chart #1 shows the average temperature anomaly, considering an important period for the coffee market: the last El Niño in the past decade with high intensity, that led to crop failures in both arabica and conilon.

For selected cities in major coffee-producing regions, El Niño had different impacts: for Três Pontas and Patrocínio, temperatures were higher than the average in 53% of the key flowering/cherry growth periods analyzed. For Manhuaçu and São Mateus, however, the shares are higher: 67% and 89%, showing that arabica areas in Zona da Mata and conilon areas in Espírito Santo may be more vulnerable to the phenomenon than the remaining areas.

For precipitation, these areas are also under more threat: 78% of the key development periods in Manhuaçu and São Mateus received rainfall levels below average; in Três Pontas and Patrocínio, the shares were 67% and 44%, respectively.

Image 1: Temperature Anomaly – Active El Niño during key development periods

Source: ICE

Image 2: Precipitation Anomaly – Active El Niño during key development periods

Source: ICE, Refinitiv

The combination of lower rainfall levels and higher temperatures may negatively affect coffee trees, and a good metric used to measure crop health is the NDVI (Normalized Difference Vegetation Index). Chart #3 shows the correlation between average NDVI levels between May and June of the previous year of every crop and yields for the South of Minas Gerais.

Intuitively, the higher the NDVI anomaly, the higher the expected yield. Some crops, such as 18/19 and 20/21, had much better results than expected by their NDVI levels – but that is due to other factors, such as a stronger on-year effect from previous cultural care and more sophisticated techniques.

Therefore, the weather seen in the recent past is also important to understand the potential of the next crop. Considering the average NDVI anomaly seen this year, yields will likely be higher than reported in 21/22, 22/23, and 23/24. However, the metric's predictive power is limited, as shown by the 18/19 and 20/21 crops, charging weather in the next quarter with a higher weight for the next crop’s development.

Image 3: Yields vs. NDVI Anomaly – South of Minas Gerais

Source: Refinitiv

Image 4: Precipitation Anomaly Forecast – Aug 25 to Sep 8 (% of normal)

Source: Refinitiv

In Summary

This week, coffee prices bounced back from 145 c/lb. Amid Brazil's advancing harvest and ongoing El Niño activity, it's crucial to examine potential impacts on the upcoming 24/25 Brazilian crop.

Regions like Zona da Mata and Espírito Santo might be more vulnerable due to high temperatures and low rainfall levels. The NDVI, a measure of crop health, correlates positively with yields in South Minas Gerais.

Still, while recent NDVI levels (which provide the best fit against yields) suggest better yields than the last three years, they may not encompass all influencing factors as seen in exceptional past crops (18/19, 20/21). Weather remains pivotal for the upcoming crop, with current weather forecast models suggesting heavy rainfall levels for the next two weeks.

Weekly Report — Coffee

Written by Natália Gandolphi
Reviewed by Pedro Schicchi


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