The Coffee Market Got Sour Real Fast

Where To Go From Here?

When some thought it couldn't have gotten any worse, it did. The market closed this Friday at 151.30 cents. A drop of almost 20 cents compared to last Friday when the futures market closed December at 170.10 cents. While the market was hovering at 170, I believed that the market would loom around these numbers mainly because the fundamentals of Brazil, not harvesting due to crop damages were good enough right?

Nothing or almost nothing has changed in the macro this week, mainly talking about international relations other than the unfortunate event of Poland getting hit by a Russian missile. The latest blunders by the new government here in Brazil made future interest rates rise, leaving the Brazilian Central Bank with almost no room to reduce interest rates by the 23rd of this month. Bad news for those who need credit to take care of their crops, to invest in new machinery, and don't even mention those who think that having coffee in hand is a good deal. Surprisingly we could see a rise in the SELIC (Brazilian interest rate) to 14% while staying stable at 13.75 for a bit. The president-elect, Lula traveled to the COP27 conference, he continued to question the "market" by reacting negatively and also with strange comments about the social and fiscal responsibility of the country when discussing the government spending cap that he wanted to add 175 billion real to it. That is equivalent to $32 Billion dollars.

The Brazilian Real continued its daily struggle not to break the R$5.50 mark, which the volatility is not helping the market at all. However, on a positive note, the Brazilian real reaching R$5,40+ keeps the internal price of coffee up in Brazil in favor of producers. If the real had stayed at R$5,00, the exporters would have had to force the internal price even lower or consider seeing an extreme difference in FOB prices.

Movements in certified stocks were also calmer, closing the week at 484,000 bags. But we do have currently, 584K bags pending to be certified. This could well put the ICE stocks at over 1 million bags again in the coming weeks. The reverse has completely dismantled, which gives some breathing room in December-March for those who have already lost a lot of money carrying coffee in the reverse September-December.

According to the news we have, two large trading companies were offering coffees at very competitive prices (well below replacement) perhaps this is a small light at the end of the tunnel, where it is believed that the stock situation will be even tighter. GCA stocks (American ports) also showed a small reduction of 58 thousand bags, falling to 6.23 million bags. And nothing considerable that would move anything in the futures market.

The funds continued to increase their short positions and the roasters took advantage and fixed. In other words, almost nothing changed during the week, except for the value of coffee on the New York Stock Exchange. Internally, the market tightened and differentials began to narrow sharply. Exporters not finding much business to be done. Farmers are holding as much as they can, as one mentioned to me while I was participating in the Semana Internacional do Cafe in Belo Horizonte this week, "Experts said it would go from 1300, it dropped to 1100 and I didn't sell. It dropped to 900 and I won't sell".

With the new president-elect already causing a negative stir in Brazilian markets with his questionable comments on the world stage already, I guess you can say that we are in the "coffee winter" right now. Let's see what follows in the coming weeks as Brazil starts to close out the year and the world cup just starts.