End Of The Year Coffee Blues (or Reds)
End of the year Blues maybe? Or reds? The market is not taking any prisoners and it closed this Friday with December at 170.10c/lb & 175.75 cents last Friday while opening this Monday at 167.00c/lb. This week also we will be rolling to the Mar23 expiry contract date. Also Tuesday, November 15 is independence day in Brazil and a lot of people are looking at the futures market and taking an extra day off.
So technically the market lost a lot of strength with a lot happening. After politics, we have hedge funds sold on the market again, more than 600k pending new certifications entering ICE stocks (either recertifications or “new coffee” but the message ends up being the same. Currently, we have over 440K bags in stock, and this week we should have the green coffee association numbers for October 2022. Roasters are taking advantage and fixing an interesting amount. When the macroeconomic situation begins to give relief, with a milder inflation number in the US, interest rates may rise by 0.50 p.p. instead of 0.75 p.p. Maybe in December, which could mean a reduction in economic activity but not a stronger recession. We could have greater diplomatic activity in the Ukraine war since Russia pulled out of Kherson. However, as 2022 showed us, anything can happen.
Inside Brazil, the last week was disastrous for the next government and both the Real and the BOVESPA felt the blow with the possibility of a spending spree, in addition to names of notoriously low credibility for the transition economic team (people who were condemned and/or spent time in Prison that were close to Lula in his past government). Not to mention unhelpful speeches. Come on Lula, we thought you learned something this time around.
If this was just the appetizer of the new political age to come, things will be worse than we thought.
New numbers for the week looked like more sales orders than anything else. October exports totaled 3.4 million bags, just 3.2% lower than the same period last year (3.58 million). The accumulated January to October is also very similar with 32.294 million & 33.514 million. Guys, either the numbers start to drop, or the crowd out there will continue to press the sell button or, at best, defend the position. At this pace, we WILL surpass the number of Brazilian coffee exports in 2021 when everyone was panicking all year
It so happens that the new crop forecast reports from some banks (Rabobank is one of them) also start to show the Brazil crop and almost 69 million bags, and this means more than 46 million Arabica, and consequent exports above 40 million (discounting domestic consumption and harvest carry). Another sell call? Yes, we know that these projections are all way too early to consider but they do come out for a reason.
Some trading reports, despite not mentioning numbers yet, indicate that they do not observe any problems with the flowering, as several technicians and agronomists have indicated to us. We have had multiple hailstorms in isolated regions in the South of Minas but we can't really say how will that affect the market. A drop in the volume of exports from Brazil in the 1st half of 2023 may be too late to see a reaction in the market when the expectation is for a very good harvest to come in a few months.
What are your thoughts on the coffee industry for the end of the year?