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Patience - Crop Update

Coffee Update Feb 2021 Header

Executive Summary

  • The Brazilian reais has failed to break out of the range in recent months, risk appetite for EM currencies has increased recently, but the state of the government's finances and the slower vaccination administration is a headwind
  • Mid-crop Colombia expected to be lower, Colombia bought 135,000 bags of Brazils 
  • Colombian diffs are +52/55 cents/lb, and the Mitaca crop is expected to be smaller 
  • Central America coffee production far from clear, the crop should be in full swing, but we still hear labour problems due to COVID-19
  • Semi-washed Arabica being graded has surpassed our estimates, but we expect this coffee to start to tail off in the second half of March 
  • Fine and good cup coffees are trading above R$700/bag, and they have sold over 80% of the current crop and a large chunk of the 21/22 crop 
  • A strong rally in futures prices will be detrimental to exporters and producers who have sold around due to large margin calls
  • Differentials remain high, and we expect this to remain the case as demand for coffee remains strong, but the supply of Arabica coffee falls
  • Our estimate for the Conillon crop will remain unchanged, and we still expect this to cap prices on the London market
  • Options open interest has been something we have noted, strikes of 150cts/lb with a September expiry have been heavily traded
  • Roaster buying comes into play around 120/122cts/lb, of course, there can be spikes lower in this market, but we expect heavy buying below 120cts/lb
  • When we look at the data algos process, we do not see a clear signal for them with Brazil shipments high, certified stocks rising or lacking conviction, lack of clarity from C. American production and prices have failed to break upside technical levels
  • We remain constructive but believe patience is essential, the options market for us may be preferential, but we do expect prices to break higher with a target of 150cts/lb in Q3

Macroeconomic Update

Central Bank Balance Sheets as a Percentage of GDP

The rising balance sheets of Central Banks will continue to support markets but when will it stop?