Aug 23 / Laleska Moda

Vietnamese exports remain below average, supporting the market

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  • The coffee market remains bullish. For robusta in particular, Vietnamese exports are still below-average (and even below historically lows) in recent months, reinforcing the perception of low stocks in the country, with accumulated shipments in 23/24 10.2% lower than the same period in 22/23.

  • In addition to Vietnam, Indonesia shipments are also below historic lows, although a rebound is expected in 24/25.

  • On the other hand, more favorable weather conditions in Vietnam could lead to a recovery in production in 24/25. However, our expectations are still for a lower production next season.

  • Another potential bearish point for the market is the increase in the certified Robusta stocks on the ICE, in the last two months

  • On the other hand, weather uncertainties in Brazil could still support prices - both for Robusta and Arabica - in the coming weeks.

Vietnamese exports remain below average, supporting the market

Robusta coffee prices rose for much of this week, reflecting concerns about the supply of the variety. Since 2023, prices have risen due to the decline in production in Vietnam and Indonesia in the 23/24 season, and also due to climatic concerns in the development of the 24/25 crop in the former country.

The region's supply tightening justifies the recent Asian export trend.. In the case of Vietnam, coffee shipments have been below historical averages since April, and in some months even below historical lows, reinforcing the view of low stocks in Southeast Asia. Accumulated shipments in the 23/24 season (22.5 M bags) are already 10.2% lower than in the 22/23 season (25.1 M bags).

In Indonesia, shipments also reached low levels in 23/24, besides in the first months of 24/25 (which began in April/24). However, exports are expected to increase by the end of the year due to the expected recovery in production in this new cycle.

It's worth noting that this scenario of limited supply in Southeast Asia has also led to some changes in destinations. For example, in the European Union (the world's largest coffee importer), the share of Vietnamese, Indonesian, and Indian coffee in the bloc's imports fell in 23/24 (Oct/23-Jul/24), with a significant drop in July, in line with Vietnam's low exports. On the other hand, we see a significant increase in imports of Brazilian grains - as shown in a previous report.

Vietnam – Exports (‘000 bags)

Source: Refinitiv

European Union - Imports by country/region ('000 bags)

Source: Europena Comission, Eurostat

Despite the more bullish scenario, it's worth noting that we also have some potential downside in the market. Firstly, the more favorable weather in Vietnam in recent months - especially in July - has raised some agents' expectations of a slight recovery in the country's production in 24/25. However, we still expect a smaller crop this season due to higher average temperatures and below average cumulative rainfall until June.

Another noteworthy development is the rebound in ICE-certified coffee stocks. Although stocks are still below historical averages, July and August saw a greater inflow of coffee, exceeding the 2023 average for these months. Expectations of higher exports from Brazil and Indonesia - especially to Europe, given concerns about the EUDR - and a possible short-term recovery in stocks could exert downward pressure.

Cumulative Precipitation – Vietnam – Central Highlands (mm)

Source: Refinitv

Estoques Certificados de Robusta (‘000 sacas)

Source: ICE

However, it is important to remember that expectations for the remaining 24/25 crop still point to a coffee defict, especially given the lower production of robusta. In addition, the weather outlook in the origins will also influence coffee prices in the coming months, for both Arabica and Robusta.

In this case, the market's biggest uncertainties revolve around Brazil. Lower temperatures in early August have pushed LN and NY futures higher. A new cold front is also on its way to the coffee producing regions in the coming days, keeping the market on its toes. In addition, there are growing concerns about the dry weather in the country as some flowering has been seen in the producing regions.

Dryness in the coming weeks, especially in September, could have an impact on the 25/26 harvest, adding to the rally. On the other hand, abundant rainfall in the upcoming months would bring a more optimistic outlook for the following season. In this case, with the intensity of the La Niña phenomenon decreasing in the last month, the weather is expected to remain closer to normal in the second half of the year.

In Summary

Weather uncertainties have brought volatility to the arabica and robusta coffee markets in recent days. The passage of a cold front through Brazil over the weekend led to frost in some coffee growing regions, pushing up commodity prices. However, initial reports indicate that the impact was much lower than in 2021, as the frosts occurred mainly in lowland areas and the condition of the crop - as measured by the NDVI index - is better than this year.

On the other hand, better estimates of 25/26 production potential could be made in the coming weeks as the next season's flowering is expected to begin.

On the bearish side, Brazilian export data for July showed increased shipments, particularly of conilon/robusta coffee, which reached historic highs. The continued strong performance of Brazilian exports could put some downward pressure on the market in the short term, just as Indonesian exports did in July.

However, it's important to remember that the fundamentals still point to price support in the medium term. Even with a possible decline in some destinations, demand remains generally resilient, and the outlook continues to be for a global deficit in 24/25 with stocks (both origins and destinations) at lower levels.

Weekly Report — Coffee

Written by Laleska Moda

laleska.moda@hedgepointglobal.com

Reviewed by Livea Coda
livea.coda@hedgepointglobal.com
www.hedgepointglobal.com

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