May 10 / Natália Gandolphi

Coffee Weekly Report - 2024 05 10

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  • The U.S. Climate Prediction Center's forecast indicates a transition from El Niño to La Niña within the upcoming month, with implications for the coffee market in various regions. La Niña's delay could provide short-term pressure to Vietnam's 24/25 crop development with the extension of El Niño’s impact. Cumulative rainfall remains below average in the Central Highlands.

  • In Brazil, attention shifts to the 25/26 crop as La Niña may bring water stress similar to the 21/22 season in September. This transition could also intensify the hurricane season in Central America and lead to higher temperatures in Colombia's coffee-producing regions.

  • While concerns decrease in Brazil by October, persistent worries remain in Central America, regarding both the region's coffee harvest and the overall hurricane season.

  • La Niña's delayed transition creates short-term challenges for Vietnam, while Brazil faces potential medium-term effects on its 25/26 harvest. The situation demands careful monitoring of weather patterns across major coffee-producing areas.

La Niña’s Timing: What to expect?

This week, coffee prices remained on the downtrend, alongside other softs commodities. Prices have also mirrored other benchmarks, such as oil: front-month WTI prices fell by roughly 8% since mid-April, and while coffee responded more aggressively (about -15%), it stayed in the middle of the road between sugar and cocoa (roughly -10%, and -30%, respectively, considering the previous highs).

So far, price decreases have been more correlated to spec moves than fundamentals themselves. For instance, in our monthly analysis, we’ve been observing the vulnerability implicit to record-high spec positions (Figure 1). It is important to note, however, that going by the correlation between prices and spec position, there was more room for correction, towards 202-209 c/lb, considering a linear regression for the past 70 periods, since January 2023 and the 5-year series – the level that the first contract is currently testing (Figure 2).

Other points have also been watched by the market, despite not currently altering the global Supply & Demand balance: results from coffee roasters showed a slowdown in the first quarter, especially for results that reflect more in-home consumption. KDP, for instance, posted a -0.3% variation in U.S. coffee volume sales in 1Q/24, and a 1% drop compared to the same period last year.

Figure 1: ONI Index – ENSO Status (°C)

Source: IRI

Figure 2: Cumulative Precipitation – Central Highlands (mm)

Source: Refinitiv

The transition between the two ENSO stages is expected to take longer than initially expected. With this, the focus turns to the 3rd quarter: in September, the phenomenon could generate water stress in Brazil, such as the impact seen on the 21/22 crop – precipitation and temperature anomalies are highlighted in the maps in Figure 3, indicating the climate may become hotter and drier.

It is also worth paying attention to Central America, as La Niña could intensify the hurricane season in the region, and also to Colombia, with higher temperatures in some of the coffee producing areas.

With the phenomenon continuing until the end of the year, in October, concerns decrease in Brazil, but remain in Central America. In Colombia, specific regions may experience a reduction in rainfall – special attention should be paid to the main harvest.

In this scenario, the later transition between phenomena ends up causing more concerns for Vietnam in the short term, while the highlight for Brazil should happen in the medium term, focusing on the 25/26 harvest.

Figure 3: Temperature and Precipitation Anomalies for La Niña   September

Source: NOAA, Hedgepoint

Figure 4: Temperature and Precipitation Anomalies for La Niña         October

Source: NOAA, Hedgepoint

In Summary

The U.S. Climate Prediction Center has forecasted a shift from El Niño to La Niña in the upcoming month. A late transition means that El Niño will still have more influence over Vietnam’s 24/25 crop development.

Despite some rainfall in Vietnam's Central Highlands, overall precipitation remains below average. The focus also shifts to Brazil's 25/26 crop, as La Niña could cause water stress similar to the 21/22 season, in September. Central America and Colombia may experience intensified hurricane seasons and higher temperatures, respectively. Although concerns ease in Brazil by October, they persist in Central America. This delay in transition presents short-term concerns for Vietnam and medium-term attention for Brazil's 25/26 harvest.

Weekly Report — Coffee

Written by Natália Gandolphi
Reviewed by Laleska Moda


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