Apr 5 / Natália Gandolphi

Coffee Weekly Report - 2024 04 05

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  • This week, coffee prices saw significant fluctuations, particularly in Brazil, where conilon/robusta prices surged past 1000 BRL/bag.

  • While arabica prices followed a similar trend, conilon garnered stronger support, resulting in a narrower spread between the two at 80 BRL/bag.

  • Attention now shifts to Brazilian conilon figures for the 24/25 harvest amidst ongoing global robusta deficits and the development of Vietnam’s 24/25 crop.

  • Spreads for NY arabica and LN robusta N4-U4, though showing similar trends overall, exhibited stronger movement for arabica over the week.

  • The potential for arabica to fill the gap left by robusta shortages raises questions about the arbitrage between NY arabica and LN robusta, nearing the 30 c/lb mark. These dynamics will be closely watched/monitored in the firthcoming week as both major coffee producers remain under scrutiny – being the major gauge for arbitrage levels.

What's driving the current momentum?

This week, coffee prices observed increased volatility, with swift but relevant developments in both exchange prices and domestic prices in Brazil. First, it’s vital to note the move in conilon/robusta prices in Brazil: the variety broke the 1000 BRL/bag mark, and although arabica moved in tandem, support was heavier for conilon.

Consequently, the spread between the two coffee types narrowed to 80 BRL/bag – a fact that doesn’t go unnoticed, since the spread has inverted before for a brief period in the 16/17 cycle, during the Brazil crop failure. In this scenario, the recent downward adjustments to Brazilian conilon figures in 24/25 will be watched more closely by the market with the beginning of the harvest now in April, and the larger market context with the persistent global deficit for robusta.

Still, given that the market finds balance in itself, it’s been given that eventually destinations would need to tap into arabica’s supply to fill the gap left by robusta. The question that has remained, however, is: what’s the limit? In this sense, we need to observe the trend for arbitrage between NY arabica and LN robusta. The arb moved closer to the 30 c/lb mark and started to correct – this level will remain relevant moving forward. It’s also important to note that the arb between September contracts saw more strength when compared to July contracts over the past quarter.

Figure 1: Domestic Prices in Brazil (BRL/bag)

Source: Cepea

Figure 2: NY-LN Arbitrage: July and September 2024 Contracts (c/lb)

Source: ICE, Refinitiv

Individually, spreads have also had important developments that need to be considered: even though both NY arabica and LN robusta N4-U4 spreads have shown similar trends, especially year-to-date, the recent movement was stronger for arabica. Within this week, the N4-U4 robusta spread went from 90 USD/mt to 95 USD/mt (+6%), whereas the arabica spread increased from 0.7 c/lb to 0.85 c/lb (+21%).

Indeed, it may be early to pinpoint a solid change to the structure that has characterized the market, especially given the proximity of Vietnam’s 24/25 crop development during a still active El Niño – showing the possibility of below-average rains until the third week of April.

In any case, the increase in arabica imports by traditional destinations is non-negligible. The steepest move was seen in the European Union: from 58% in the 3-month moving average ending in September 2023 to 70% in January, the latest available data point. Considering the same window, the United States saw an increase from 80% to 86%, whereas Japan’s peaked in December (64% in September to 71%).

Figure 3: July-September Spreads: Arabica and Robusta

Source: ICE, Refinitiv

Figure 4: Arabica Share in Imports

Source: Eurostat, JCA, USITC

In Summary

This week witnessed heightened volatility in coffee prices, particularly in Brazil, where conilon/robusta prices surpassed 1000 BRL/bag. While arabica prices followed suit, conilon received stronger support, narrowing the spread between the two to 80 BRL/bag. Market attention now turns to Brazilian conilon figures for the 24/25 harvest amidst a persistent global robusta deficit and development of Vietnam’s 24/25 crop amid dry weather.

The potential for arabica supply to compensate for robusta shortages raises questions about arbitrage between NY arabica and LN robusta, which approached the 30 c/lb mark, with arabica responding positively, in turn. For the upcoming week, the two major coffee producers will be in the spotlight, being a gauge for arbitrage dynamics.

Weekly Report — Coffee

Written by Natália Gandolphi
Reviewed by Laleska Moda


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