Oct 21 / Laleska Moda

New York-London arbitrage widened again

Arabica and robusta futures prices continue to fluctuate sharply due to uncertainties about global supplies of the bean in the coming months.
However, arabica contracts have strengthened in recent weeks, widening the arbitrage between this variety and robusta after reaching historic lows in September.-This scenario has also seen the spread between Arabica Bica Dura and Conilon 7/8 in Brazil return to positive levels.
Despite fears of a smaller crop in Vietnam on 24/25 season, the possible impact of the drought in Brazil on the25/26 crop has captured the market's attention in recent days and supported arabica futures, the most weather-sensitive variety in Brazil, until last Friday.
Despite the recent rains in Brazil's coffee-growing regions, the drought combined with the higher temperatures of recent months may have affected some of the productive potential of the crops, especially those that first flowered between August and September. However, as new flowers open in the country, we could see some pressure in the coming days.

The coffee market continues to be highly volatile in October. While arabica futures in New York have found support in recent days, robusta contracts in London have weakened. This has allowed the arbitrage between the two coffees to widen again this month, after reaching historic lows in September.

This movement has also been seen in the Brazilian market as the spread between 20% good cup arabica and 7/8 conilon has returned to positive territory. It's worth remembering that in September, conilon coffees (regardless of quality) were traded above R$1,500/sc for part of the month, even at higher prices than arabica, which caused the spread between the two to go negative, due to supply concerns and stronger demand for conilon.

In the short term, however, the focus has shifted to Brazilian arabica production on the 25/26 season. Following expectations of a global robusta deficit in the 24/25 cycle, led by lower Brazilian production and also the expectation of a lower harvest in Vietnam, the possible impact of adverse weather in Brazil is increasing the risk of a new deficit in the next cycle.

Despite the return of rain to Brazil's coffee plantations in the second half of October - and forecasts of more to come - the combination of dry conditions and higher temperatures until early October could still have a negative impact on production. Particularly in the arabica-growing regions of São Paulo and Minas Gerais, cumulative rainfall is still below the historical average - and in the case of the former state, below the historical minimum - casting doubt on the recovery of the crop, especially as many coffee plantations flowered in August and September.

In addition, soil moisture remains below historical lows in most regions, which could also be a negative indicator for the development of the 25/26 crop. However, with flowering at the end of September and now in October, it's still too early to make any production estimates for next season, and the first production figures will be available once the setting of the flowers that have opened so far has been checked. In addition, the continuity of the rains over the next few months, as well as an assessment of the recovery of the crop, will be essential for a better estimate of the production potential on 25/26.

Brazilian exports continue to show strong figures as supply from other origins is limited. Not only have arabica exports increased, but conilon continues to set new records, supporting expectations of stronger shipments in 24/25.

However, there are some conditions that could affect Brazilian exports in the coming months, such as the possible delay in the implementation of the EUDR and the increase in supply in Vietnam as we approach the 24/25 harvest. On the other hand, there is a growing consensus of a smaller crop in Vietnam this season, which could affect the country's exports in the coming months.

It is worth remembering that lower supply in the 23/24 crop has already led to a reduction in the country's shipments, which could be positive for Brazilian exports in the medium to long term as Brazilian beans increase their share of the global market.

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New York-London arbitrage widened again

New York-London arbitrage widened again

NY Arabica, LN Robusta and Arb NY-LN (1st Contract, until the 18th)

Brazil: Spread Arabica Bica Dura – Conilon 7/8 (R$/sc)

Brazil: Cumulative Precipitation – Minas Gerais (mm)

Brazil: Soil Moisture – Minas Gerais (mm/0-1,6 m)

Brazil: Cumulative Precipitation – São Paulo (mm)

Brazil: Soil Moisture – São Paulo (mm/0-1,6 m)

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Weekly Report — Coffee

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