Porto Alegre, September 22th, 2022 – The coffee market finds support in the low physical availability, but shows difficulty in following the gains due to weak demand. The expectation around the Fed’s decision shook markets and brought volatility to the dollar and international coffee prices. The Fed raised the US prime interest rate by 0.75%, in line with market expectations. And that must reduce traders’ anxiety a little bit.
On the fundamental side, the number from Conab (50.38 mln bags) reinforces the idea of a lower-than-expected Brazil’s 2022 crop, already anticipated by SAFRAS (58.20 mln). And a smaller crop in Brazil must result in a lower flow of exports and very low stocks at the end of the 22/23 business cycle.
Low availability helps to lift an apparent bottom above 210 cents, which keeps the market away from the psychological reference of 200 cents. However, weak demand serves as a counterpoint to bullish moves, creating a cap at 230 cents.
The brake on world activity and the growing signs of recession in consolidated economies such as the United States and, mainly, Europe, generate fears around consumption, which directly affects the coffee market. It is good to remember that the United States is the main individual consumer of coffee. Europe is the main consumer region of the beverage, responsible for 32% of the world’s total. When North America and Europe are added together, the consumption share exceeds 50%, according to ICO data.
While financial instability serves as a justification for volatility in coffee prices, the market’s focus has already shifted to Brazil’s 2023 crop. Traders on ICE US are trying to assimilate this year’s lower crop in Brazil. However, greater attention is directed to the signs of the future Brazilian crop. And in this sense, the forecast for rains in the second half of September, associated with projections of rain in good volume also throughout the month of October, creates a more favorable environment, which reinforces the idea of a full crop in Brazil next year.
It is interesting to note that the negative difference in coffee prices between the nearest position (Dec/2022) and the reference for Brazil’s future crop (Sep/2023) rose to 15.65 cents. In this sense, at the same time that the market assimilates the current lower physical availability, it also increases the bet on an improvement in future supply. And with that, the price of the Sep/23 position converges towards the level of 200 cents on ICE US.
The world coffee industry tends to extend stocks and continue slowly working its 22/23 positions, betting on a better future supply. The reference is precisely Brazil’s 2023 crop. And the forecast for rains in Brazil reinforces the idea of more coffee next year and leaves buyers more comfortable to go on with their business strategy.
Fábio Rübenich (fabio@safras.com.br) – Agência SAFRAS
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