Another extraordinary week with coffee prices surging upwards following Brazilian Government warnings of severe droughts across many of the States of the country. This is the first time in 111 years that the Government has issued such a warning. There are fears that the drought will not only affect production of agricultural crops but also the generation of electricity. As a result, arabica coffee prices rose by 12.20 cents/lb while robusta coffee prices gained $102/ton (4.60 cents/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 90 to 95 toea/kg higher than what they were last week.

The alert issued by the Brazilian National Weather System (SNM) covered 5 states including the major coffee growing area of Minas Gerais. All major crops grown in Brazil will be affected but serious concern has been expressed for the sugar, orange and coffee crops. Low water levels, however, will have a major impact on the generation of electricity given that approximately 77% of Brazil’s electricity is sourced by hydro. This will obviously have an impact on the capacity of the country to process the harvested coffee but will also present difficulties to the domestic power market in Brazil. Another factor which influenced prices this week was the report published by CONAB which estimated that coffee output in the 2021/22 coffee year will be lower than previously forecast at 48.8 million bags. This is almost 8 million bags lower than was forecast by the USDA last week. Arabica coffee production is estimated at 33.4 million bags, a decrease of 31.5% compared to the volume produced in the last harvest. Conillon output is estimated at 15.4 million bags, an increase of 7.9% on last year. Safras & Mercado estimated this week that Brazilian the coffee harvest is 17% complete as of 27th May, based on its’ estimate of a crop of 56.5 million bags. This suggests that the harvest is behind schedule based on progress seen in previous years when by this time on average of 20% of the crop would have been harvested. However, Comexim has suggested that harvest is even more delayed with only 8% of the crop in the South of Minas Gerais, 5% in Cerrado and approximately 10% in Zona da Mata harvested so far.

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. These sources will not have taken into account the dramatic rise in futures prices seen this week so the chances are that the differentials quoted here will be on the high side. Brazilian 3 /4’s, appear to be lower at around minus 22; Honduras HG’s are steady at plus 23; as are Kenya AB FAQ’s at plus 100/110; Colombian UGQ’s are unmoved at plus 52; similarly PNG Y1’s which are still not widely quoted appear to be steady at plus 8. If an exporter had fixed a price on Friday for August/September delivery, he should have secured a price somewhere between 166.25 and 173.10 cents/lb.

The situation in Brazil is clearly more serious than many had thought, and it is clear that Brazilian output will be lower than many have anticipated. Indeed, if the situation is as dire as the evidence seems to suggest at the moment, then it would not be surprising to see many Brazilian exporters default on their contracts although privately-held stocks are probably high enough to prevent such a situation. Consequently there seems every chance that prices will continue to rise over the week ahead.