The US dollar strengthened against all major currencies this week as a result of the US Federal Reserve raising the liquidity ratio for US banks as a measure to ease credit during the pandemic. This forced most commodity markets sharply downwards. Coffee was no exception and both coffee markets fell, giving back practically all that they gained the week before. Arabica coffee prices lost 4.0 cents/lb over the week while robusta coffee prices lost $23/ton (1.0 cent/lb. In the absence of local market distortions, roadside parchment coffee prices in Papua New Guinea over the week to come will probably be around 30 to 35 toea/kg lower than what they were last week.
Another reason for the slump in commodity markets this week can be traced back to a sharp fall in oil prices which not only affects commodity investor confidence but also has a knock-on effect on the currencies of oil producing countries like Colombia and Brazil. Rather surprisingly a decrease in the GCA monthly stock figures for February had only a very limited effect on the market. Prices initially rose when it was reported that there had been a fall, but quickly resumed their downward path thereafter. GCA coffee stocks in warehouses in all ports of the United States totalled 5,790,571 bags at the end of February, 52,600 bags lower than were reported at the end of January and 8.3% or 521,655 bags lower than in February 2020. Nestlé published its 2020 annual report this week highlighting that the despite the problems caused by the pandemic, the company’s financial and non-financial performance for the year was very positive. The report indicates that Nespresso maintained what Nestle terms mid single-digit organic growth, with positive growth across all regions, although the North American market stood out with strong double-digit rate growth. The out-of-home segment also saw good momentum, particularly in France and the United States
There appears to be no reliable regularly-published data on coffee price differentials, so once again I have had to use sources, the accuracy of which cannot be guaranteed. These other sources suggest that movements in physical price differentials were not particularly uniform this week. Brazilian 3 /4’s, appear to be slightly lower at around minus 23/24; Honduras HG’s, appear to be steady at plus 20; Kenya AB FAQ’s are much higher at plus 105/110; Colombian UGQ’s are unmoved at plus 50; as are PNG Y1’s at plus 8. If an exporter had fixed a price on Friday for July/August delivery, he should have secured a price somewhere between 136.25 and 139.40 cents/lb.
This week’s fall although understandable in the context of movements in other commodity markets is nevertheless somewhat surprising. Severe wet weather in Colombia is threatening to impact the flowering of the next harvest and Guatemala is reporting that rain is causing serious problems there and will cause serious delays to the harvest and if it continues may even cause serious losses. In addition, there is now widespread agreement that there will be a deficit in the supply/demand balance over the next 12 months, so much so that the debate now appears to be more about whether there are sufficient carryover stocks to avoid shortages. Moreover there has a noticeable and large increase in the volume of open interest on the New York market since the beginning of February. Combined, all of these factors would normally suggest that prices should be rising rather than falling. The outlook is therefore somewhat confusing, but with luck prices should appreciate a bit next week.