Oct 25 / Laleska Moda

Are we still on a bullish market?

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  • In October, futures prices for both arabica and robusta coffee fell compared to September levels.

  • The downward pressure was mainly due to the return of rain in the Brazilian coffee-growing regions and new blossoming in the coffee plantations.

  • In the coming weeks, the start of the Vietnamese 24/25 harvest and the possible advance of the EUDR could also have an impact. While the former should increase coffee supply in the short term, the latter could lead to lower European demand for coffee in the short term.

  • Although we expect these factors to add to the downward pressure on the market, coffee prices could still find some support in the medium and long term.

  • In addition to the uncertainties surrounding the 25/26 crop in Brazil, the global 24/25 balance sheet still points to a deficit for the season.

Are we still on a bullish market?

Although volatility remains high, the second half of October was marked by a decline in coffee futures prices. Some of factors have contributed to this bearish scenario, such as the return of the rains in Brazil, the approach of the Vietnamese 24/25 harvest and the possible advance of the EUDR. On the other hand, while we expect these factors to contribute to downward pressure in the short term, we shouldn't forget that there is still some support in the market.

In Brazil, the cumulative rainfall in October (especially after the second fortnight) is already higher than in the last two years and close to the historical average for this period, which is a positive factor for the next coffee season, especially with new blooms taking place in the Arabica regions this month. We're expecting a better recovery of the coffee plantations if the rainfall continues to be more consistent in the coming months, which should contribute to the 25/26 season.

However, we shouldn't forget that the cumulative monthly rainfall for most of 2023 and 2024 was below the historical average (with average temperatures also slightly above average). This unfavorable weather scenario contributed to lower production in 24/25 and may also have jeopardized part of the production potential of 25/26, maintaining the scenario of great uncertainty regarding Brazilian supply next year and increasing market volatility in the coming months.

Cumulative Precipitation - Brazil - Monthly (mm)

Source: Refinitiv

On the other hand, in the short term we expect to see an increase in supply in Vietnam as the 24/25 harvest intensifies in the coming weeks - although our expectations for this season are for lower coffee production than in 23/24. It's worth noting that domestic prices in Vietnam have fallen in recent weeks and trading has been slow, with weaker demand in the country as buyers wait for the new season's beans to hit the market.

Vietnam – Domestic Prices (VND/kg)

Source: Refintiv

In addition to the larger Vietnamese volumes expected to come onto the market in the coming months, the high probability of the EUDR being brought forward to December 2025 has also led to bearish sentiment in the market. Following the European Council's approval in the middle of this month, all that remains is for the Parliament to approve the advance request. Although the Parliament's decision is not expected until the second half to end of November, the postponement of the legislation is likely to lead to a drop in demand in the coming weeks.

This is because European importers and companies have stepped up their purchases in recent months to get coffee into the EU before December in anticipation of the EUDR, which will potentially increase the bloc's stocks until the end of 2024. European import figures up to September this year already point to a recovery in the volume of coffee entering the bloc compared to previous years, with cumulative imports of 36.6 million bags of green coffee up to last month.

So, without the pressure of the EUDR and with higher European stocks, we could see a slowdown in EU demand in the short term. Given that the European Union is the largest importer of coffee in the world, weaker demand could add to the downward pressure on the market.

EU – Cumulative Imports by year (M bags)

Source: Eurostat, Agridata

Global Coffee Balance (M bags)

Source: Hedgepoint

However, as mentioned earlier, there are still points of support for the market in the medium to long term. In addition to the risks associated with the 25/26 Brazilian crop, we expect a deficit in the global coffee balance for the current crop year due to lower production in the country in 24/25 and a smaller crop in Vietnam in 24/25. On the other hand, while higher imports from various consuming countries in 2024 could lead to a recovery in stocks, in general this volume would still be lower than in previous cycles, and we also expect a reduction in stocks at origin by the end of the season.

So, while we may see a more bearish scenario in the short term, we still expect some support for prices over the course of 24/25, especially after the Southeast Asian harvest and during the Brazilian off-season.

In Summary

In general, arabica and robusta futures fell in October, particularly under pressure from the return of rains in Brazil, which could help the 25/26 crop. In addition, the approach of the 24/25 harvest in Vietnam and the possible advance of the EUDR could contribute to the decline in the market, both due to an increase in robusta supply in the coming months and a possible reduction in European demand, as coffee imports into the bloc have been boosted in 2024 by the regulation, which could contribute to a recovery in stocks.

However, there may still be points of support for bean prices as the season progresses. A global coffee deficit is still expected for 24/25, reflecting lower production in Brazil and Vietnam. In addition, stocks at origins and even destinations may still be below historical averages, even if they show a slight recovery in consuming countries.

Another point of attention in the market that could increase volatility in the coming months is the 25/26 season in Brazil. Although the rains in October should help the crops to recover and set, the weather up to September was unfavorable and could still result in a loss of production potential in the following harvest.

Weekly Report — Coffee

Written by Laleska Moda

laleska.moda@hedgepointglobal.com

Reviewed by Victor Arduin
victor.arduin@hedgepointglobal.com
www.hedgepointglobal.com

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