There can be no doubt that a cloud of uncertainty hangs over the coffee market at the moment and as a result the coffee market remains very volatile reacting, many times over-reacting, to any scrap of news or information. This was very apparent this week with prices jumping all over the place, falling heavily on Wednesday on news that there would be light rain in Brazil over the week to come, only to bounce back again on Friday when it became apparent that the rain would not be widespread and would not continue. Over the week arabica prices finished almost where they started, losing just 0.30 cents/lb. Robusta coffee prices however were a bit more stable rising on evidence that roasters are increasing the proportion of robusta in their blends as a result of the high arabica coffee prices. Over the week they gained $41/ton (1.75 cents/lb). In the absence of local market distortions, roadside parchment coffee prices in Papua New Guinea next week, will probably be about the same as they were last week.
Rabobank revised their forecast for 2022/23 global coffee production this week lowering it down from their previous estimate of 172.3 million bags to 169 million bags. They also revised their estimate of demand putting it 300,000 bags lower at 170.3 million bags. As a result, the deficit is now seen at 1.3 million bags, 3 million bags lower than the 1.7 million bag surplus that was previously forecast. Although the lack of rain in Brazil is keeping coffee prices high market players are also very concerned about the looming recession that high energy prices will cause especially in Europe as a result of the war in Ukraine and Russia’s weaponization of gas supplies, in response to sanctions imposed by the West. Not only will this reduce demand, but it will also add to the soaring costs faced by roasters and the industry could be hit by a double whammy of high costs and higher coffee prices at a time when consumers are having to cut back on expenditure. So faced with these opposing forces it is hardly surprising that the markets are so volatile.
I still cannot get access to any reliable regularly-published data on price differentials, so once again I have had to use sources, the accuracy of which cannot be guaranteed. Physical price differentials appear to have been remarkably resilient to the futures markets gyrations and appear to be relatively stable. Brazilian 3/4’s remain at minus 18; Honduras HG’s are also unmoved at plus 39; Similarly Kenya AB FAQ’s continue to be quoted at between plus 70 and plus 90; while Colombian UGQ’s also remain at plus 74. Without any update on PNG Y1’s, I would guess (and it is just a guess) that they might also be unmoved at around plus 4. Therefore, had an exporter fixed on Friday in New York for Dec/Jan delivery he may have been able to secure a price between 228.10 cents/lb and 234.20 cents/lb.
There is a distinct lack of rain in the weather forecasts for Brazil and what is forecast will do more damage than good especially if it induces a flowering that is not supported by further rain. The drawdown in certified stocks continue and have hit a 23 year low. So, the outlook in that respect is positive. However, the European Central Bank raised interest rates this week by 0.75% and if inflation continues apace then further increases will be made. Higher energy prices are a real concern, and it is now obvious that there will be a recession which will impact demand. Nevertheless, the bounce back on Friday is encouraging and given that market players appear to be more focused on the immediate situation in Brazil, it looks reasonable to speculate that prices might close higher next week possibly significantly higher.
Source:
Mick Wheeler, UK