After bumping into dense resistance, coffee ended up erasing gains on ICE US in a typical bullish slowdown movement. The worsening of the external mood ended up negatively influencing coffee prices, which were already undergoing a realignment process after the rally at the end of August. Coffee followed the fall in oil and reflected the increase in global risk aversion. This is because there is a growing expectation of a still aggressive Fed in the cycle of increasing interest rates. On the fundamental side, coffee finds support in the smaller Brazilian crop, but faces stiff resistance when rising due to the shorter demand.
Traders are still trying to digest the lower-than-expected Brazil’s 2022 crop. And that guarantees an upward path for the coffee price curve in New York, in the midst of financial instability. There is great difficulty in quantifying the crop in a year of very erratic production in Brazil, marked by drought, frost, plant abortion, and heavy rain in the graining period followed by low moisture. The news from the crops suggests that the market has not yet priced in the real size of the losses. Growers argue this is no longer a loss of additional potential compared to the record 2020 arabica crop (last year of high load), but a crop failure compared to the small 2021 crop, thus changing the comparison status. If confirmed, it would make room for an even sharper upward shift in the coffee price curve.
But what is the difficulty for the market to continue the upward movement? It is just that many traders look with caution at the small Brazilian physical availability. For that reason, now they avoid recognizing that the low receipt at cooperatives, the short delivery to trading companies, and the coffee scarcity in trading regions is only a reflection of lower production. They consider that the delay in the seasonal cycle, with a slower harvest and delayed processing, also helps to explain the lack of available supply. They argue that some growers are holding coffee a little longer, waiting for a better definition of Brazil’s 2022 crop and the market direction. It is important to emphasize that this September is very important by being the moment when there is the highest percentage of delivery of sales advance of the current crop. And it is undeniable that there is a certain tension in the air regarding these receipts.
The market also lacks a stronger demand signal. The world industry remains shrunken, which creates barriers and inhibits the surge in coffee prices, creating a ceiling on the advance of ICE US prices. It is because, without a consistent flow on the buying side, the upward movement of prices is weakened. The macroeconomic scenario – marked by financial uncertainties, fear of recession, and more expensive money with high interest rates – justifies the caution of the world industry. The gas crisis that affects Europe, the main coffee-consuming region in the world, brings more uncertainty to coffee consumption.
Accordion effect and the outlook for 2023
The coffee market has been characterized by an accordion movement, but sustaining an upward bias. And it should continue to do so, seeking a better realignment between lower supply and short demand. With the Dec/22 position, it has raised its performance level, finding apparent accommodation between the support at 220 cents and resistance at 240 cents. The break of these lines could bring some short-term technical direction.
It is worth emphasizing that the spread of the coffee curve on ICE US remains inverted. In this sense, even with the frustration of Brazil’s 2022 crop, the bet on a full Brazil’s 2023 crop continues. In this sense, the initial impressions of the next Brazilian crop, starting from the blossoming, continue to be a determining factor for a better realignment between coffee maturities on ICE US (making the curve flatter). In this case, the confirmation of good blossoming and favorable post-blossoming end up confirming this scenario priced in the coffee curve on ICE US, which would reinforce the bearish long-term sign for external prices. But weak blossoming and disappointing signs with Brazil’s future crop may reverse the behavior of longer positions.