Sep 6 / Laleska Moda

Brazilian spread between arabica and robusta is already on negative levels

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  • In recent weeks, both robusta and arabica prices have risen in the Brazilian domestic market. However, robusta has seen a greater appreciation, surpassing arabica values this week. The last time prices of the varieties had this behavior was in January of 2017.

  • The Cepea/ESALQ Coffee Indicator for the Robusta neared 1,490 BRL/bag in the last few days, while the Arabica Indicator remained ate 1,440 BRL/bag levels, leading the spread between varieties to reach negative numbers.

  • In addition to the recent increase in London contracts, many growers in Brazil are holding their beans, while demand for Brazilian conilon is high amid lower availability in Asia, which is also supporting domestic prices.

  • As for futures prices, the recent rally in robusta contracts has also led the arbitrage between the two coffees to historically low levels. Export data from Vietnam and Indonesia continue to highlight tight robusta supply.

  • The market also remains highly volatile as weather-related risks loom on the horizon. Aside from our expectations of lower inputs in the Vietnamese 24/25 crop, warm and dry weather is expected to continue in Brazil in the coming days, increasing downside risks to the 25/26 coffee development.

Brazilian spread between arabica and robusta is already on negative levels

Arabica and robusta prices Brazilian domestic prices increased between August and early September. However, the intensity of the rise was different for each variety, with Robusta prices more strongly appreciated. On Wednesday, the Cepea/ESALQ Robusta Indicator reached its highest level of the week at 1,488.34 BRL/bag, while the Arabica Indicator closed at 1,443.45 BRL/bag, with a spread of -44.89 BRL/bag (Arabica prices were 3% lower than Robusta).

It is good to note that the last time the spread was negative (robusta prices were higher than arabica) was in January 2017. In Brazil, besides the increase in London prices, many growers are holding their beans as the Brazilian conilon continues to be well demanded, given the current tight global supplies, which is also given support to domestic prices.

Robusta futures are also appreciating at a faster pace than those of arabica - despite some price correction in the latter part of this week - resulting in low arbitrage levels between the two, close to 20 cents/lb.

Cepea/ESALQ Arabica and Robusta Indicators (BRL/bags)

Source: Cepea/ESALQ, Hedgepoint

NY Arabica (c/lb) - LN Robusta (USD/mt) – Abritrage (2nd Contract)

Source: Refinitiv

Globally, robusta has been supported by the smaller 23/24 crop in Indonesia and Vietnam and the resulting lower availability in recent months. While the Indonesian 24/25 season is set to recover, the latest export data still shows below average shipments. Export data for the first three months of the 24/25 season (apr-jun) shows a cumulative volume of 786k bags, down 33.4% from the 23/24 cumulative and down 44.7% from the historical average.

In Vietnam, export data also supports lower stocks in the country. August shipments were 13.8% lower than Aug/23 and 34.8% lower than the 1.8 M bags average for the month. Cumulative figures for 23/24 show a 10.4% decline from 22/23 and down 6% y/y to 23.7M bags. However, low export levels could be repeated in the coming season of 24/25 in Vietnam, as adverse weather conditions are likely to affect production until mid-2024.

Given the current scenario, we expect the availability of Robusta to remain limited in 24/25 and with spreads between the variety and Arabica likely to remain low in the coming months. However, it is good to note that the current arbitrage is already leading to a shift in consumption towards Arabica in some countries (such as Brazil) and could lead to a reversal of the trend in the long term.

Indonesia Coffee Exports (M bags)

Source: Bank Indonesia

Vietnam Coffee Exports (M bags)

Source: Refinitiv

Another point we need to consider is that weather risks are also increasing in Brazil, as we mentioned in previous analysis (link). Forecasts for September point to higher temperatures and the continuation of dry weather, specially in arabica regions. Albeit still in small scale, blooming for the 25/26 has been reported across the country, increasing downside risks to coffee development as current cumulative rainfall and soil moisture are below average levels. In this sense, if rainfall does not return to coffee regions at higher volumes in the second half of the month and temperatures continue to be high, prices could find support in the coming weeks.

Soil Moisture – South of Minas – Brazil (mm)

Source: Refinitv

Precipitation (mm) and Temperature (°C) Anomaly – Brazil – Sep.

Source: Inmet

In Summary

Brazilian prices for Robusta have risen faster than those for Arabica in recent weeks, with the former outperforming the latter this week, leading to a negative spread between the two.

This scenario reflects both a retreat by Brazilian producers and the rally in robusta futures in recent weeks. In this respect, the arbitrage between LN and NY is positive, but has reached extremely low levels in recent days on the prospect of a tight supply of robusta. In Southeast Asia, exports from the two main producers (Vietnam and Indonesia) remain below historical averages and the outlook for the Vietnam 24/25 crop is not as positive, which could keep the arbitrage at lower levels in the coming months.

However, there are a few points to bear in mind. First, the current arbitrage could affect robusta demand in the medium to long term. In addition, weather risks are increasing in Brazil as the weather remains dry and warm. The situation is particularly worrying for the arabica areas, and if higher rainfall does not return to the producing regions by the end of September, we could see some support for prices, especially for arabica.

Weekly Report — Coffee

Written by Laleska Moda

laleska.moda@hedgepointglobal.com

Reviewed by Iganacio Espinola
ignacio.espinola@hedgepointglobal.com
www.hedgepointglobal.com

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