Nov 3

Coffee Weekly Report - 2023 11 03

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  • Coffee prices are currently testing a significant level (~167 c/lb), indicating the highest volatility since Q2 2023.

  • The Brazilian Real's recent strength, shifting from 5.17 to 4.89, has provided support to coffee prices, driven by a robust trade balance (US$ 80.2B surplus, expected to reach US$ 91B by year-end) and improved growth expectations.

  • The correlation between coffee prices and the Real has strengthened to -0.8 in the past 4 weeks, signaling a notable inverse relationship.

  • Certified coffee stocks have reached a record low of 360K bags, with the drawdown mainly from Brazilian coffees.

  • Despite initial optimism, the 24/25 Brazilian coffee crop may not achieve expected production levels, particularly in the South of Minas Gerais, with estimates at 19M bags and a lower range at 17.2M bags.

Points of support in the coffee market

Coffee prices are, once more, testing a very significant level (~167 c/lb, Chart #1), marking the highest volatility measures since the second quarter of 2023. Accounting for that support, there are a few points that need to be highlighted, especially as the potential of the 24/25 Brazilian crop becomes better seen after the major flowerings of the season.

First, the Brazilian Real. The currency has provided support to coffee prices, moving from 5.17 in the first week of October to 4.89 currently, backed by strong trade balance results (US$ 80.2B surplus from January through October, with the expectation of reaching a record US$91B by the end of the year).

Also, the currency received support from upside readjustments in growth expectations: the IMF revised growth from 2.1% to 3.1% earlier in October – and the scenario received more support as economic agendas advanced in Congress over the past weeks. Correlation between coffee prices and the BRL grew stronger, to -0.8 in the past 4 weeks, in contrast to the +0.16 seen for the YTD measure (noting that a correlation closer to -1 shows a stronger inverse relationship, and closer to +1 a stronger direct relationship).

Image 1: NY Arabica 2nd Contract and Fibonacci Retracement Lines (c/lb)

Source: ICE, Refinitiv, hEDGEpoint

Image 2: NY Arabica 2nd Contract and BRL

Source: ICE, Refinitiv, hEDGEpoint

Still, there are also some important highlights specific to the coffee market, namely: certified stocks and Brazilian 24/25 crop development.

In the former, stocks reached a fresh new low in November, at 360K bags – last year, the lowest level reported was 382K bags – notably, a new record-low in the 20-year series (as stocks only fell below that level before, in 1996).

The drawdown was mostly from Brazilian coffees – and only now, with the increase in NY, Brazilian differentials fell below the short-term averages, as they were limiting any potential new gradings. Other origins remain on more comfortable differentials, that could hinder gradings, but it’s important to note that, Honduras, for instance, fell to the 8-16 c/lb range this week, between HG and SHG coffees.

Last, but not least, the 24/25 crop in Brazil. Despite weather improvement and a very optimistic initial view for the Brazilian crop, some regions might not reach record production levels next year, as thought by some market players. For instance, South of Minas Gerais is likely to produce less than in 20/21 – our current estimate is at 19M bags, but with a lower range of estimates at 17.2M bags.

Image 3: Certified Arabica Stocks (‘000 bags)

Source: ICE, hEDGEpoint

Image 4: Coffee Differentials and NY Arabica (c/lb)

Source: ICE, Refinitiv, Safras & Mercado

In Summary

Coffee prices are undergoing significant testing around 167 c/lb, displaying the highest volatility since Q2 2023. The Brazilian Real's strength, shifting from 5.17 to 4.89, supported prices due to a robust trade balance (US$ 80.2B surplus, expected to hit US$ 91B by year-end) and improved growth expectations. The correlation between coffee prices and the Real strengthened to -0.8 in the last 4 weeks.

Noteworthy in the coffee market is the record-low certified stocks level at 360K bags, primarily from Brazilian coffees. Meanwhile, the Brazilian 24/25 crop, initially optimistic, may not achieve expected production levels in some regions, such as South of Minas Gerais, estimated at 19M bags, potentially being readjusted in a range until 17.2M bags.

Weekly Report — Coffee

Written by Natália Gandolphi
[email protected]
Reviewed by Lívea Coda
www.hedgepointglobal.com

Disclaimer

This document has been prepared by hEDGEpoint Global Markets LLC and its affiliates ("HPGM") exclusively for informational and instructional purposes, without the purpose of creating obligations or commitments with third parties, and is not intended to promote an offer, or solicitation of an offer, to sell or buy any securities or investment products. HPGM and its associates expressly disclaim any use of the information contained herein that may result in direct or indirect damage of any kind. If you have any questions that are not resolved in the first instance of contact with the client ([email protected]), please contact our internal ombudsman channel ([email protected]) or 0800-878-8408 (for clients in Brazil only).

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