- In Q3 2020, signs of global economic recovery are becoming more pronounced; however, this recovery is not uniform and is primarily driven by government spending while domestic demand is lagging
- Since the beginning of easing lockdown measures, the credit data indicated that spending has improved; however, it remains below pre-crisis levels
- Fiscal and monetary policy has shown to be successful in protecting people and businesses; however, containment measures failed to protect to slow down the virus
- Because of signs of new localised outbreaks, economies are at risk once again in Q3, potentially requiring another inflow of fiscal spending
- The outlook of the US economy in the upcoming quarter will depend on two things: the spread of the virus and the policy environment.
- In Europe, intra-bloc tourism will set the trajectory for recovery, especially as international travel remains low, and the way the countries will monitor the spread of the virus
- Nevertheless, consumer aversion to public places and adjusted working-from-home conditions are more likely to keep consumers at home for longer
- Despite the Chinese economy being the first country to recover from the pandemic, consumers remain wary of social interactions, and increasing tensions between China and the US add to economic uncertainty
- In Brazil, the lack of appropriate lockdown measures along inadequate healthcare provision has left the country to be an epicentre of one of the world's most severe waves of infections
- In major coffee exporter countries, the rebound in Q3 will be lower than expected due to the low performance of foreign demand and private consumption
- Earnings results saw that the inevitable drop off in demand away-from-home. However, Starbucks results suggest that approximately 97% of its stores across the globe are open
- JDE Peet’s earnings show that the consumer packaged goods market has seen strong sales, aiding the premise that at-home consumption has offset the loss of out of home consumption
- Below we have calculated the potential loss of demand during the lockdown and as economies have started to re-open, using various assumptions
- Online sales have also seen a large increase, and we expect H2 2020 demand to return to more normal levels and help offset the loss in H1 2020
- From a supply perspective, we are expecting rains in Brazil to help offset some of the recent dryness
- There is talk of some very early flowering in the Conillon areas which is very early, especially as we are moving into an off-cycle
- This year’s delayed harvest continues at a steady clip and is 90% finished at the time of writing, shipments have slightly tailed off.
- Local Brazilian prices have seen more selling, and we expect coffee to be bought at the current differentials
- The March21/March22 spread has tightened significantly, in the last few months
- We have increased our Colombia crop for the current year to 13.8m bags, after a good Mitaca crop
- While we have also increased our Honduras number by 500,000bags to 5.5m bags, we still see issues in C.America.
- Lack of skilled workers and the recent lockdowns have hindered the crop but progress was better than we expected.
- We still see tightness in mild Arabica’s going into next year, especially after the recent drawdown in Honduran certified stocks
- We have dropped our Vietnam crop figure to 28m bags from 29m bags and we expect this to prompt tightness in the longer-term spreads
- Carry-over will be lower and we expect Ho Chi Minh inventories to continue to fall with the lower crop number
Market Activity & Trade Ideas
- The rally in both contracts has been strong, and consistent with our June report we favoured building a long Arabica futures position but deferred down the curve. This has proved fruitful
- We maintain our options view of owning Dec 130 call which currently costs $5.99, in our last report the premium was $2.85
- We still think there is an upside to this option but it could be worth selling a Dec 160 call worth $1.75
- The March 2021/March 2022 spread has widened to $4.10 since tightening into $2 and we anticipate further tightness and favour holding a long position
- For Robusta, we favour owning the November 2020/November 2021 spread which trades at -$75 at the time of writing
- We are bullish on Robusta futures, with a potential drop-off in Vietnam and Conillon crops and a recovering demand outlook. However, if traders prefer to play the options market by buying 1400 January calls and selling 1600 January calls, you pay out $57 but could potentially only make $140. With this in mind, futures may have more value
As the nation enters the Q3 of 2020, the outlook on economic recovery is shifting. The view was that once lockdown measures are lifted, the consumer spending would rebound to normal levels, driving the economic growth. That does not seem to be the case anymore. Consumer aversion to public places and adjusted working-from-home conditions are more likely to keep consumers at home for longer. Indeed, the retail sales bounced back in May to 17.7% m/m and then grew at a slower pace in June at 7.5% m/m, and the total yearly change was 1.1%, as shops opened across the country. Overall, since the beginning of easing lockdown measures, the credit data indicated that spending has improved; however, it remains below pre-crisis levels.