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  2. Setting the Scene
Coffee Update Header July 2020 July 2020

Executive Summary

  • We believe that coffee prices are set to rally for the remainder of the year
  • Central bank balance sheets have risen sharply, helping to provide liquidity and supporting asset prices
  • Risk aversion is starting to return but the sentiment is vulnerable to a downside correction
  • It is too early to say for sure the impact on coffee demand due to COVID-19, we believe that at-home consumption will offset some of the loss in out of home consumption
  • We think the speciality business may struggle due to the loss of employment and consumer income
  • Furlough schemes have helped support coffee consumption in the near term, despite the rise in the savings ratio
  • Once these schemes finish we expect a large proportion of furloughed employees to be made redundant
  • Coffee consumption is inelastic but the recession may trigger a reversion to traditional blends, away from speciality
  • Latin America is now the epicentre of the pandemic and Brazil’s handling of the virus has raised alarming questions
  • We could see some downside to Brazilian consumption but a lot of this demand is on-farm and tricky to truly quantify
  • The Brazilian harvest is continuing at a steady pace and exports remains supported
  • Conilon shipments have been strong, keeping pressure on London spreads and flat price
  • The Vietnam crop looks set to come in slightly under our estimate of 29m bag at 28 -28.5m bags
  • We prefer using the options market for KC at the time of writing, as the traders may get hurt on the roll. See trading strategies section
  • The roll yield for London remains intact and the managed money short suggests this could continue

Demand: The Current Climate 

The global pandemic captivates financial markets, but the economic cost of the virus is still to be fully calculated. Equity indices have recovered 41% of the losses incurred in February and March as of July 2nd; fuelled by low-interest rates, and large liquidity packages from the Fed and other central banks, and the expectation of better economic data improving risk appetite.  We expect this sentiment to continue as economies start to return to normal, but what will be the new normal and what of a second wave? In coffee, we have been focusing on what will be the impact on demand due to the lockdown and rises in unemployment. Throughout this report, we will outline how stimulus packages and savings ratios are impacting coffee consumption, and assess the price elasticity of demand for coffee.

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