Aug 30 / Laleska Moda

Weather and certified stocks keep the coffee market volatile

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  • Arabica and Robusta coffee prices have remained volatile in recent days. On the bullish side, weather concerns and their impact on the commodity's global production remain on the market's radar.

  • While stocks remain tight in Vietnam, the market is wary of the impact of extreme heat in early 2024 on the production of 25/26 - we continue to expect a lower output in the new cycle.

  • In Brazil, after the last two cold fronts in August, forecasts point to higher temperatures and low rainfall in early September.

  • It's worth remembering that the return of the rains to the country will be crucial in the coming months as Brazilian coffee fields enter the development phase for the 25/26 crop.

  • On the bearish side, the recent rally in ICE certified stocks - especially for Arabica - led to a sharp correction on Thursday 29th.

  • A notable feature of the market is the relatively low liquidity at the business closingi n both the physical and futures markets. In Vietnam, for example, the closing of contracts for the 25/26 crop is lower than in previous years.

Weather and certified stocks keep the coffee market volatile

Coffee prices have remained volatile in recent days, reflecting concerns about the global supply of the commodity. After falling in July, the Arabica contract in NY and the Robusta contract in LN are at high levels, reflecting concerns about the impact of weather on global production.

In Vietnam, there are concerns about high temperatures and drought affecting production in 24/25. While rainfall has improved since July, temperatures remain above historical averages, which could limit a recovery in the cycle - our estimates still point to lower production in 24/25 than in 23/24.

As for Brazil, after fears of two cold fronts passing through the country, agents are now waiting for the flowering of the 25/26 crop. Although some areas have seen flowers open, the sector is still anticipating the main bloom in Brazil's key regions, which could be favored by increased rainfall.


Cumulative Precipitation – Vietnam – Central Highlands (mm)

Source: Refinitiv

Average Temperature – Vietnam – Central Highlands (°C)

Source: Refinitiv

However, forecasts to date indicate drier weather in early September, which has also caused some concern in the sector. In general, 2024 has been characterized by lower rainfall in Brazil, which has led to greater water stress in coffee plantations and has kept players on alert for possible impacts on production potential. Given that Brazil is the world's largest coffee producer, any change in the country's expected supply could lead to price volatility.

Cumulative Precipitation – Brazil – South of Minas (mm)

Source: Refinitv

Average Temepratures – Brazil – South of Minas (°C)

Source: Refinitiv

On the other hand, any estimates for 25/26 are still premature, especially since no significant flowering has been reported. In addition, NOAA has recently reduced the probability of La Niña in the coming months to almost equal probabilities for ENSO-neutral and La Niña in August-October 2024, with the latter having a greater chance of occurring later in the year. The intensity of the La Niña phenomenon has also been reduced. If the weather continues to be closer to neutral for the rest of 2024, especially in terms of rainfall, the next coffee season could benefit, potentially leading to short-term price corrections.

Other factors could also lead to corrections in the coming weeks. An increase in ICE certified Arabica stocks has been reported in recent days. Although lower than historical levels, August stocks were up 3.2% from July and are already 72.8% higher than the same period in 2023. The recovery in certified stocks led to a drop in futures prices on Thursday.

On the robusta side, prices have remained at historically high levels in August - the Nov/24 contract hit 16-year highs on Friday - but some indicators suggest that the market may be technically overbought, with the possibility of a near-term correction.

Cumulative Precipitation – Brazil – South of Minas (mm)

Source: Refinitv

Average Temepratures – Brazil – South of Minas (°C)

Source: Refinitiv

In Summary

Weather factors continue to influence the coffee market due to their impact on the commodity's production. In Asia, traders remain cautious about the impact of adverse weather on Vietnamese production in 24/25. In Brazil, with the flowering period underway, the market is also keeping a close eye on the country’s weather, especially waiting for an increase in precipitation given the drier weather so far.

In general, we expect the 24/25 deficit to continue to support prices in the long term, reflecting the lower production expected in Vietnam and Brazil.

However, the reduction in the intensity of La Niña and the greater likelihood of an ENSO-neutral situation by October could lead to a more optimistic climate scenario for Brazilian 25/26 crop production, which could exert downward pressure in the short term. Other bearish factors to watch include the recovery in ICE-certified stocks and technical factors on the robusta side that suggest a correction in values in the short term.

It's worth noting, however, that uncertainties over supply and high price volatility have kept liquidity low when it comes to closing deals in the market, both in the physical and futures markets. In Vietnam, for example, contract closings for the 25/26 crop are lower than in previous years.

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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