After a failed recovery move in late July and early August, coffee prices traded to a seven-month low this week. The market has been pressured by a rebound in Brazil’s arabica production following the end of the La Niña weather event. In addition, sluggish global risk sentiment over the past few weeks has weakened the demand outlook on ideas it would have a negative impact on restaurant and retail shop consumption.
Brazil arabica production has a two-year cycle, with “on-year” crops usually outperforming the off years. The 2022/23 season was an on-year crop, but the Brazil’s coffee trees had come through two straight years of drier than normal conditions due to La Niña. With the end of La Niña earlier this year, 2023/24 is expected to be Brazil’s largest off-year crop on record. However, it is only expected to exceed the second largest off-year (2019/20) by 2.7 million bags and be roughly 5 million bags below the 2018/19 and 2020/21 crops.
Colombia’s coffee production has seen little benefit from the end of La Niña. Their 12-month running production totals have seen incremental improvements in June and July, but nothing too impressive. The last four monthly readings have come in below an 11 million-bag annualized pace, and they are the lowest 12-month running totals since the end of 2013. The only major arabica-growing nation besides Brazil to have a significant jump in 2023/24 production has been Peru with an 15.8% increase. They represent 4% of global production versus 46% for Brazil and 12% for Colombia.
While out of home demand has been hurt by negative risk sentiment, it should benefit from the extended decline in inflation readings that have been seen across many developed economies. Coffee prices were last at these levels in mid-January, and that was followed by a 34.65-cent rally (23.9%) through the start of February. RSIs and stochastics are into oversold territory, but the stochastics have yet to flash a buy signal. The Commitments of Traders report showed the managed money traders were net short 27,282 contracts as of August 15, which is their biggest net short since January. This suggests that coffee has plenty of fuel for a short-covering rally.
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Originally Published August 18, 2023
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