Amid volatility, the year 2020 was positive for coffee prices
The year 2020, which seemed endless, is finally coming to an end. Even with all the turbulence, the year was positive for the coffee market. On ICE US, coffee had many ups and downs, but sustained a positive average performance, starting a recovery movement, after a 2019 with very flattened prices. The beginning of the year was under strong negative pressure due to the pandemic. Besides the bad financial context, coffee was also sharply affected by the record crop reaped this year by Brazil. On the other hand, the shortage of milds and low certified stocks on ICE US created bullish bubbles over the year. The delay in the blossoming and the potential losses of Brazil’s 2021 crop ended up creating an environment of positive volatility and price recovery. However, it should not be forgotten that twice in 2020 the second position of arabica on ICE US was traded below the level of 100 cents. It is a strong indication of selling pressure.
The dollar, another important variable for coffee in the composition of domestic physical prices, ended up skyrocketing in the face of increased risk aversion with the coronavirus pandemic. It is good to remember that the dollar started the year pegged at BRL 4.01 and set the year’s high at BRL 5.97 in mid-May. It retreated and fell to BRL 4.84 to rise again and close the year possibly above the level of BRL 5.00. This exchange rate fluctuation was decisive for the performance of physical coffee prices over the year.
The FOB port differentials (bases), which started the year very firm, ended up falling with the physical advance of Brazil’s 2020 crop and later partially recovered. The export price is still under pressure from the record crop reaped this year by Brazil.
In the composition “ICE + dollar + differential,” the weight of the exchange rate prevailed. The result of all this for the physical price was a first semester with price escalation, driven by the very favorable exchange rate. In nominal terms, this same price level was again reached in September and now at the end of the year. However, in real terms, the purchasing power of a coffee bag was much greater in the first half (growers’ profitability), since the exchange rate inflation still weighed little on the market. This explains the agitation of sellers in the first months of the year.
In the physical market, the best arabica cup stood out, especially cherry coffee. Fine cherry was trading above BRL 700 a bag in September, driven by the lack of milds in the world. It is also important to mention the strong external flow of conillon. With the devalued real, Brazilian conillon became cheaper in dollars, attracting foreign buyers, who were looking for alternatives to the low supply from Vietnam and the delayed work in Indonesia.