July arabica coffee (KCN23) on Tuesday closed down -7.45 (-4.03%), and July ICE robusta coffee (RMN23) closed down -26 (-0.92%).
Coffee prices Tuesday sold off sharply, with arabica dropping to a 2-1/2 week low. Forecasts for favorable weather in Brazil that will allow farmers to finish the country's coffee harvest undercut prices. Losses in arabica coffee accelerated on technical selling after prices dropped below the 100-day and 200-day moving averages.
Coffee prices are also under pressure on last Friday's report from Bloomberg that said the world's biggest coffee makers are delaying bean purchases from Brazil as they use up stockpiles accumulated during the pandemic and wait for lower prices.
An excessive long position by funds of robusta futures could provide fuel for any long liquidation pressures. Last Friday's weekly Commitment of Trader’s (COT) report showed funds boosted their net-long robusta coffee positions by 1,517 in the week ended June 13 to 46,051, a 17-month high.
A steady decline in ICE arabica coffee inventories is supportive of prices. On Tuesday, ICE-monitored arabica coffee inventories fell to a 6-3/4 month low of 541,774 bags.
Robusta has support from increased demand from roasters who are substituting arabica beans for cheaper robusta beans in a variety of retail coffee blends to control production costs and shield consumers from inflation.
Tightness in robusta coffee supplies is bullish for prices and sent robusta coffee up to a record high last Friday (data from 2008). Vietnam's General Department of Vietnam Customs reported on June 9 that Vietnam's May coffee exports fell -8.5% m/m to 149,667 MT. Also, Jan-May Vietnam coffee exports are down -3.9% y/y at 866,121 MT. Vietnam is the world's largest producer of robusta coffee beans. Also, the USDA's FAS projected on May 22 that 2023/24 Indonesian robusta coffee production would fall -20% y/y to 8.4 mln bags after excessive rain hindered pollination. Indonesia is the world's third-largest robusta coffee producer.
Robusta has support on global supply concerns after coffee trader Volcafe forecasted the global 2023/24 robusta coffee market would see a record deficit of 5.6 mln bags. In addition, the Association of Indonesian Coffee Exporters and Industries said that Indonesia would see its 2023 coffee production fall -20% y/y to 9.6 mln bags due to damage from excessive rainfall across its growing regions.
On June 8, the U.S. Climate Prediction Center declared an El Nino weather event, which could undercut global coffee production. The U.S. Climate Prediction Center said last Thursday that sea surface temperatures across the equatorial Pacific Ocean had risen 0.5 degrees Celsius above normal, and wind patterns have changed to the point where El Nino criteria have been met. An El Nino pattern typically brings heavy rains to Brazil and drought to India, negatively impacting coffee crop production.
The pace of Brazil's coffee harvest has picked up, which boosts coffee supplies and is bearish for prices. Cooxupe, a Brazil coffee export cooperative group, reported that Brazil's Cooxupe coffee harvest was 17.1% completed as of June 9, above the 9.6% completed at the same time last year.
Heavy rains last week may have delayed some of Brazil's coffee harvest, although updated forecasts call for dry conditions this week and next. Somar Meteorologia reported Monday that Brazil's Minas Gerais region received 23.4 mm of rain in the week ended June 18, or 411% of the historical average. Minas Gerais accounts for about 30% of Brazil's arabica crop.
In a bearish factor, the June 7 annual report from the USDA's FAS projected that Brazil 2023/24 arabica coffee production would climb +12% y/y to 44.7 mln bags. The USDA said most of the coffee-producing areas are in the negative year of the biennial production cycle, and rainfall volumes have been mostly favorable in all growing regions.
Global coffee supplies have tightened after the International Coffee Organization (ICO) reported on May 4 that global 2022/23 coffee exports during Oct-Mar fell -6.4% y/y to 62.295 mln bags. Also, Cecafe reported last Tuesday that Brazil's May green coffee exports dropped -20% y/y to 2.12 mln bags. By contrast, Honduran May coffee exports soared +79% y/y to 1.2 million bags. Honduras is Central America's biggest exporter of arabica beans.
On the negative side for arabica was the projection from the USDA's FAS on May 22 that Colombia's 2023/24 coffee production would climb +2% to 11.6 mln bags. Colombia is the world's second-largest arabica bean producer.
A bearish factor for robusta coffee was the projection from the USDA's FAS on May 18 that Vietnam's 2023/24 coffee production would climb +5% to 31.3 mln bags. Another negative factor is an increase in ICE-monitored robusta coffee inventories May 24 to a 5-3/4 month high.
Arabica has carryover support from May 18 when Conab cut its Brazil 2023 coffee crop estimate to 54.7 mln bags from 54.9 mln bags forecast in Jan.
The International Coffee Organization (ICO) projects the global 2022/23 coffee market deficit will widen to -7.3 mln bags from a -7.1 mln bag deficit in 2021/22. ICO projects that 2022/23 global coffee production will increase +1.7% y/y to 171.27 mln bags, and 2022/23 global coffee consumption will increase +1.7% y/y to 178.53 mln bags.
The USDA, in its bi-annual report released on December 23, cut its global 2022/23 coffee production estimate by -1.3% to 172.8 mln bags from a June estimate of 175.0 mln bags. In addition, the USDA cut its 2022/23 global coffee ending stocks estimate by -1.7% to 34.1 mln bags from a June estimate of 34.7 mln bags. Meanwhile, the USDA's Foreign Agriculture Service (FAS) on November 22 cut its Brazil 2022/23 coffee production forecast by -2.6% to 62.6 mln bags from a prior estimate of 64.3 mln bags. This year was supposed to be the higher-yielding year of Brazil's biennial coffee crop, but the coffee output was slashed by drought.
On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
