Jul 26 / Laleska Moda

Coffee prices back on track after near-record levels

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  • The contracts of arabica in New York and robusta's in London have fallen in recent days. The corrections have come amid expectations of a near-term improvement in supply.

  • In Southeast Asia, despite low stocks in Vietnam, Indonesia's 24/25 harvest is nearing its peak, with producers offering a greater volume of coffee in recent days.

  • Selling pressure combined with lower demand from buyers in recent weeks, who have restricted purchases due to high prices, led to a narrowing of differentials in both origins.

  • In Brazil, selling pressure has also increased in recent weeks as the 24/25 harvest draws to its end. In addition, the devalued BRL has stimulated sales in recent days.

  • Preliminary data from Cecafe suggests that exports in July should reach new highs, which also reinforces the more bearish scenario in the near term.

  • In the macroeconomic scenario, the latest data from the United States point to robust growth in the American economy in the second quarter and a reduction in inflation, which should maintain a possible scenario of a rate cut by the FED in September.

Coffee prices back on track after near-record levels

After a strong rally at the beginning of July, the NY Arabica and LN Robusta contracts have fallen in recent days. The September Arabica contract closed at 230,2 c/lb on Friday - after touching a near three-week low of 227,5 c/lb on Thursday – and a decrease of 3,4% in the week, while the September Robusta contract closed at USD 4,332/mt, down 4,4%. The pressure came mainly from expectations of a short-term increase in supply.

In Vietnam, despite low carryover stocks, differentials remain under pressure due to increased supply from Indonesia and lower demand from buyers who withdrew from the market after high prices in early July. Increased rainfall this month in Vietnam has also raised expectations that the damage from the drought until April will be reduced.

It's worth noting, however, that cumulative rainfall until June was still below historical averages and the production potential of 24/25 may have been compromised. Our models still point to lower production in 24/25, close to 27 million bags, which should contribute to the deficit in the season.

Nevertheless, in the short-term, the peak of the 24/25 harvest in Indonesia has increased the volume of robusta on the market, with local differentials narrowing in recent days, with offers ranging from USD 520/mt to USD 600/mt over the September contract. This temporary increase in supply is expected to put downward pressure on the market in the coming weeks.

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

Source: Refinitiv

Cumulative Precipitation – Vietnam (mm)

Source: Refinitiv

In addition to Southeast Asia, the progress of the harvest in Brazil has also brought producers to the market in recent days, especially with the recent devaluation of the Real, the Brazilian currency. The 24/25 harvest had already reached 81% this week, above the 77% average for the last five crops in this period and the 74% achieved in the same period for the 23/24 crop. The arabica harvest was estimated at 75%, above the five-year average of 69%, while the conilon harvest is in its final stages at 95%, also above the average of 93%.

In addition, preliminary data from Cecafe indicates that Brazilian coffee shipments in July are approaching record levels for the month, which has also reinforced the bearish scenario of recent days. On the other hand, many traders are still concerned about logistical problems at the Port of Santos, which have led to some delays in shipments.

It's also worth remembering that despite the short-term increase in supply, the overall scenario for 24/25 is still one of a global deficit. The forecast is that the higher arabica production estimated for this season will not be enough to mitigate the shortfall in robusta. Therefore, our expectations remain of a bullish trend for arabica and robusta prices in the medium term.

Finally, on the macroeconomic front, data released by the U.S. government this week indicated that Q2 GDP grew at a higher-than-expected 2.8% rate (vs. the market's forecast of 2.0%). Data from the PCE price index also pointed to a slowdown, which should maintain a possible scenario of a rate cut by the FED in September.

Arabica Harvest - Brazil (% of total)

Source: Safras & Mercado

Conilon Harvest - Brazil (% of total)

Source: Safras & Mercado

In Summary

The coffee market has declined in recent days, both arabica and robusta. The downward pressure came from the prospect of increased supply in the short term, with the peak of the harvest in Indonesia and a greater presence of sellers in Brazil, given the approaching of the end of the 24/25 harvest and the recent devaluation of the BRL. In addition, good rains in Vietnam in July and possible record shipments from Brazil also added to the bearish sentiment.

On the macroeconomic front, data showing a stronger U.S. economy maintains the outlook for a rate cut by the FED in September, which could also affect the commodity scenario.

However, it's worth remembering that this more bearish scenario in the coffee market could be reversed in the coming months. In Vietnam, even with the recent rains, the outlook is that adverse weather in early 2024 will still lead to lower production in 24/25. In Brazil, we have also revised our figures downwards (albeit marginally) due to lower grain processing yields. As a result, Arabica production in 24/25 is unlikely to offset the shortfall in Robusta, leading to a fourth consecutive year of global deficit, which could support prices in the medium term.

Weekly Report — Coffee

Written by Laleska Moda

laleska.moda@hedgepointglobal.com

Reviewed by Thais Italiani
thais.italiani@hedgepointglobal.com
www.hedgepointglobal.com

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