Coffee Market Report December 2019

It’s that time of the year again! Welcome to the DRWakefield coffee round up report for 2019. Brexit continued to dominate the narrative and there was much talk about the low-price climate and how the New York C (NYC) contract is too closely aligned to the Brazilian coffee industry. In this report we will first look at the NYC market’s movements over the course of the year, to what extent it was linked to the BRL/USD currency pair, and how GBP moved against USD across 2019. Then we’ll report on some of the key news coming out of origin month by month.

NYC Market

In 2018, the NYC market’s high was in the first 10 days of the year. Would that be the case again? Thankfully not, as 2019 opened the year trading at 101.60 c/lb. It did, however, continue to lose value and the year’s low was 87.05 c/lb, which it hit on the 17th of April. The following month was a depressing month and there was much talk in the industry about how to act in a long-term low-price environment. For many origins, the NYC + their typical differentials were well below cost of production. There was a brief summer resurgence and the market was not far off the 115 c/lb level on the 8th of July. This was not to last however, and there was a strong downward trend to the end of August. In the middle of the month during a busy day’s trading, the market dipped again below the 90 c/lb level, before closing a couple of cents higher. Apart from the beginning of November, there was a strong upwards trend from the middle of October through to the year’s high of 138.40 c/lb on the 13th of December. The industry had become accustomed to low daily ranges, but the final 6 weeks of the year saw numerous daily ranges of 5 c/lb or more and volatility really surged. Why was this the case? Many explain the beginning of the movement as down to forecasted global supply issues in 2020. After that, a great deal of the movement was purely technical with a lot of short covering by the funds occurring. The market closed the final day of the year at 129.70 c/lb, 28.10 c/lb higher, representing a 28% increase in value since the year’s opening.

NYC Market and BRL/USD

Above is a graph of the NYC market (in orange) and the Brazilian Real (BRL) against the US Dollar (in purple). Why are we looking at these two variables? Well, for large parts of the year, industry folk watched the relationship between them like a hawk, as it was often the case that when the BRL lost value against the US Dollar (increases of the purple line, as the higher the number of BRL, the more you need to exchange to receive one USD), the NYC market fell, and when the BRL strengthened against the US Dollar (decrease in the purple line), the NYC increased. As you can see from the graph, this correlation did not really start till February, but for large parts of the year, we can observe a strong correlation between the two variables. However, during the big surge in the final two months of the year, we can see that during November when the NYC rallied, the BRL continued to lose value against the US Dollar. Will it gain relevance again in 2020? We’ll have to wait and see. Perhaps this time next year we’ll be talking about a different variable that people use to guess where the NYC is headed.

GBP/USD

January 1st saw the British Pound trading against the US Dollar at 1.27. Pessimism regarding the health of the US economy and the upcoming expiry of tax cuts that Trump initiated early on during his tenure, saw the US Dollar lose value against many key currencies. However, the outlook on the US economy soon picked up and more uncertainty in British politics coupled with more challenges surrounding Brexit, saw Pound Sterling lose value from a high of 1.33 in the middle of March, to a low of 1.19 in early September. The following 3 months saw the reverse, with Pound Sterling regaining value, hitting the year’s high of 1.35 on the 13th of December. It slipped again to 1.29, before closing the year at 1.32, 4% stronger than how it started.

What happened in the physical world? Let’s find out what happened at origin over the course of 2019.

Fill your boots! We all know there’s lots of coffee in Brazil, but the 18/19 crop smashed all records out of the park. In January, COMEXIM revised their figures for that crop 2.35 million upwards, driven by an increase of 1.55 million bags for Arabica and 0.8 million bags for Conilon (Robusta from Brazil). The strength of the Colombian Peso hurt exporters again. It started the month at 3250 against the US Dollar and finished at 3105. While it did not strengthen to the levels of 2900 in September 2018, it still had a sizeable impact on exporters. Excelso differentials remained firm as a result; the delay in the harvest in Central America strengthened this move.

With the NYC so low, however, prices were still well below cost of production in many countries. February saw The Colombian Coffee Growers Federation (FNC) announce that Colombian coffee might stop trading against the New York Coffee Market, as levels did not reflect reality. The FNC CEO said: “At these price levels, our coffee farming is not sustainable”. Volume was down in many Central American countries and crop estimates coming out of Costa Rica looked worryingly close to the level of 2016/7: the lowest crop on record. Although volume looked low, the percentage of speciality coffee produced increased.

Fuerza la labor! The Colombians were busy in March also. The government announced it would give an additional 60 billion pesos ($19.4 million) in aid to coffee farmers who are struggling with the low coffee market price. More than half a million Colombian families earn their living from coffee. There was still blockades on the Pan-American highway at the end of the month that connects Cauca and Nariño with the centre of the country and both the ports of Buenaventura and Cartagena. This caused gridlock in some of the busier parts of the highway and provided challenges to producers and exporters alike.

The transition from March to April marks the transition from Myanmar’s dry cool season into the wet hot season. Scattered rains arrived, the Padauk flowers (Pterocarpus macrocarpus) were in bloom, and the country was preparing to shut down for the 10-day New Year’s Water Festival (သင်္ကြန် “Thingyan”). Most coffee producers in Myanmar finished harvest in mid-March, with the last producers winding up their harvest during the first week of April. Those late harvests combined with the long national holiday are the reasons why it’s unusual to see shipments ready for export before May.

The 2018/19 crop was tough for Vietnamese coffee farmers due to the low-price climate. The drop in price caused farmers – especially in the central highlands – to change to other crops such as jackfruit, durian, passion fruit and local herbs and nuts like noni and sacha inchi. Farmers that stuck with coffee were unwilling to sell and buyers were also wary to not buy too much quantity as they expect the price to drop further. Like in Honduras, many farmers’ warehouses were full, and farmers were only selling what they needed to sell to cover daily expenses. Although its neighbours had small crops, coffee production in Honduras continued to grow and it was the largest producer in Central America by a large margin.

In April the Honduras Coffee Institute (IHCAFE) predicted more than 10 million sacks of 46kg would be produced this harvest, which would make it a record year. Certain exporters and cooperatives we have spoken to think that these numbers are somewhat inflated. Only time will tell. The FNC in Colombia continued to debate the relevance of the NYC and opined that it is too closely tied to Brazilian coffee production.

On May 17th Luckin, A Chinese coffee chain, raised more than $570 million in its initial public offering (IPO) on the Nasdaq stock market, giving it a value of around $4bn. Many hope the surge in popularity of coffee in China will drive up global demand. The Brazilian 19/20 Arabica crop was more heterogeneous than usual, with trees showing all stages of the ripening process. Total Arabica production was projected at 36 million bags, 19% lower than the previous crop, but still a very large crop for the off year in the biennial cycle. In Costa Rica the main headline was that it recorded the lowest ever harvest, reaching a total of 1,714.762 fanegas (fanegas are units of 46kg), 100,000 less than the initial Icafe forecast. Tarrazu, the largest growing region, posted a good year. Renovation at the farm level, good access to credit for producers, favourable weather conditions and more young people taking over family farms all helped this region grow and contribute 43% to the total crop volume. This stood in stark contrast to the other big regions: West Valley and Central Valley. Colombian coffee production was estimated to increase to 14.3 million bags in the 2018/19 (October-18 through to September-19) marketing year (MY) and maintain the same level in MY 2019/20. In Ethiopia there were intermittent power cuts which interrupted dry milling and therefore caused a backlog of FOB shipments. According to the Ethiopian Electric Power Authority, the power shortage was due to scarce water reserves in the dams, particularly the Gibe – III dam.

In June, Brazil coffee exports were breaking all records with 40 million bags likely to be surpassed for the period July18 to July19. Coffee remained Peru’s number one agricultural product of export and at the time were the 7th biggest exporter worldwide with 425,416 of hectares in production. The north accounts for the biggest part (43%) with the departments Piura, Cajamarca, Amazonas and San Martin. Central Peru has 33% with Junín, Pasco and Huánuco. In the south (24%) it’s Apurímac, Ayacucho, Cusco and Puno. The majority of this is from smallholders: 95% of the 223.482 coffee families farm on 5 ha or less. Today 25% is exported through farmer group organizations (coops) and 75% through exporters.

In Indonesia, the Arabica crops in Aceh and North Sumatra were finishing up and around 10% of the crop was left to pick (from May/June picking). Quality was expected to be inferior as the coffee that was delivered showed a higher defect count. Some collectors tried to blend in their existing inventory with the tail-end crop, hence the cupping and the appearance was not as good as usual. New crop was expected in October/November. Indonesia got back on its feet quickly after the ‘17/‘18 disaster and production for Indonesia’s Arabica from Sumatra is expected to total around 60,000 tons (Sep’18-Sep’19). Robusta was at its peak, however most of it was purchased by local factories. Local consumption increased steadily, especially for soluble coffee. Out of 600,000 tons produced – almost 50% goes to the internal market. The next Robusta crop will be in March/April. For the near future, the countries’ growing (young) population and its growing demand for quality coffee is expected to drain premium bean supply.

As we entered July, concerns in Brazil surged. Compared to the previous one, the 2019/20 Brazilian harvest presented many more challenges for producers and the primary driver of these challenges was the irregular flowering of coffee plants which caused an uneven maturation. What was the impact? An increase in production costs. Also, there was less availability of pulped naturals- as drastic a drop as 50% on some farms. With fewer ripe cherries available, which are the ideal ones for pulped natural processing, producers tended towards more natural processing. Another impact was more cherries on the floor – average estimates pointed to between 20-30%. When the weather is dry, these ‘ground coffees’ can be sold as ‘bebida dura’, which is considered a standard commercial coffee. However, when it rains, these coffees can only be sold as ‘rio’ or ‘riado’, the quality below bebida dura, because of the drop-in quality.

Harvesting in Tanzania kicked off, with the majority of Arabica harvesting finishing up towards the end of November. The government, in a bid to change the balance of power in favour of small producers and away from multinational exporters, implemented some large changes. One of the most important was that they banned private coffee buyers purchasing at farm level, meaning all coffees had to go to auction. Since all coffees had to be sold through a coffee auction, this eliminated other models of direct export sale. Private coffee stakeholders were concerned about the reform and lobbied hard to show that they also add value in matters such as improving quality, certification issues, financing and production.

Eventually, the government agreed to mutually collaborate with stakeholders as long as the ambition of all was to bring more power to small holder coffee farmers who form 90% of the country’s production. While uncertainties remained and we entered a trial period of a new regulatory climate, there was hope the government would positively improve Tanzania’s coffee industry.

In the second week of August Reuters reported that Brazilian coffee farmers had harvested 93% of expected production for the 2019/2020 crop. This was ahead of schedule, with the 5-year average for this period at 84%. Both producers and exporters remained concerned about quality due to the several flowerings that had taken place.

The Colombian Peso devalued against the Dollar which helped exporters with the drop in the NYC, but export prices were still below cost of production in many areas. In the middle of July, the Peso was around 3,200 to 1 Dollar, and by the middle of August it had devalued to 3,450, a reduction in value of 7.8%.

For optimum cherry development, there needs to be a certain quantity of rainfall but also the timing is of paramount importance. In Nicaragua, May through to September are key months for bean development and therefore if there is less rain in these months, this presents a big problem for coffee trees. Up until May there was a normal amount of rain but since then the gap between this year compared to last year opened up considerably. The historical average is 2,222 mm and the ‘ideal’ rainfall from an agronomist’s perspective would be between 2,250 and 2,400 mm-anything below 2,000 mm causes a hydric deficit. Due to the scarctity of rain, crop predictions pointed to a reduction in volume for the 2019/2020 harvest.

In the final week of September, Brazil was on track to ship 3.4m bags: 0.2m up on August and 0.27m up on the previous September. This would represent a record for this time of the crop year. Rain arrived at the right time and a healthy flowering was on track for October. The impending ‘mega-crop’ (2020/2021) looms on the horizon and maintained pressure on the market.

In Rwanda, the crop arrived much earlier than expected, which you will have noticed by the arrival of our first container from Kinini washing station, which usually arrives in October but this year arrived in August! The climate was more variable than usual, especially in the Northern province.

In a bid to fight corruption and clean up the legal system, Peruvian President Martín Vizcarra dissolved Congress. The country was still haunted by the ongoing investigations into the bribery scandal involving Brazilian conglomerate Odebrecht. Many opinion polls across Peru show support for the President in his bid to oust corrupt officials, but the dissolution of congress will create more uncertainty going forward and it seems that is set to continue till the next parliamentary elections on the 26th of January 2020. The first cupping festival dedicated to coffee in Amazonas happened from the 5th to the 9th of September. A range of people attended; from international buyers, to farmers and general coffee enthusiasts. Demand from this region continues to grow as word gets out on the exotic cup profiles you can find in the regions surrounding Rodriguez de Mendoza (RDM). The harvest had nearly wound up in the lower altitude areas and was nearly 70% complete in the higher altitude areas. Many exporters were short and the local price remained high. The majority of the harvest came in a 7-week window in the summer and was less than forecasted.

Vietnam enjoyed good weather in October, and this looked favourable for the 2019/20 crop (estimated to be 5-7% higher than 2018/19 crop).

Carry over stock was roughly 10% of the 2018/19 crop, and farmers were waiting for an improvement in prices to release these beans. Many exporters/traders were short with much empty space in their warehouses. There was a great deal of negotiation with overseas buyers who still needed coverage for Nov/Dec shipments.

Many industry folk experienced a loss this year and there was a rather pessimistic view from the whole coffee chain for the new crop. Farmers insisted on VND34,000 (exchange rate at the time: 1 USD ~ 23,150 VND) for the standard grade, and all local dealers/exporters had to accept that on an outright basis and offer to overseas buyers at historically high differentials (+200 for Grade 2, 5%BB). There were concerns this could majorly decrease Vietnam’s crop export of 2019/20.

Many large roasters were looking to India as a cheaper substitute. India grows approximately 1.5 million bags of Arabica and 3.7 million bags of Robusta a year and more than 70% of this is from small holders. Indian coffees are rather unique; a lot of coffee is shade grown, and the farms are rich in biodiversity. The usual Arabica crop cycle starts in October, however this year it was pushed back till the end of November due to prolonged rains. The Robusta crop was on track as expected. The Indian Coffee Board estimated the 2018/19 Robusta production to be 224,500 metric tonne and Arabica 95,000 metric tonne. Total shipments for the year remained on par with the same period in 2018. However, in comparison; Arabica shipments were 12% lower and (washed) Robusta shipments were 34% higher than the previous season.

In November, Brazil experienced a lack of rain and irregular precipitation, which fuelled the bullish sentiment held by many market players. A report published by ABN AMRO stated that Brazil accounts for 37% of global supply for coffee. Interestingly, it also accounts for 14% of global demand; a fact not as widely discussed as the supply figure. This data confirms Frank’s statement that ‘there’s a lot of coffee in Brazil’.

Harvesting kicked off in Oromia state, Ethiopia, towards the end of the month and early reports indicated quality was good, albeit in lower quantities than originally expected. During our recent visit, we travelled south-west to Bench Maji, which typically begins harvesting up to three months earlier than other growing regions. We spent time with Bench Maji Union, who are helping the region increase the quality of their coffee. In the past, much of this area’s coffee was blended with Djimma or Limu coffees in Oromia and exported under those grades. Last year Yirgacheffe 2 could be sourced at around 11-12 birr per kilo, and it was trading for around 18 birr per kilo towards the end of the month. The reason for the higher prices is mainly down to anticipated lower production across the major growing regions. Supply could be tight in Ethiopia for the 19/20 crop.

The October monthly ICO market report outlined that the difference between Colombia Milds’ differentials and other Milds’ differentials increased by 69.4% to 5.10 US cents/lb. This is in line with what we saw from Colombia: excelso and supremo differentials rose steadily since the end of the summer.

We expected the harvest to be well under way in Central America by the end of December, but mother nature did not behave like we thought she would. The lower altitude HGs and HBs were a month behind their usual timing, and this caused a 3-4-week delay shipping out of origin. With a persistently low New York price for most of the year, many producers forewent applying fertiliser and this is expected to drive a decrease in production across the region as a whole. However, Costa Rica bucked the trend, driven by an unexpected resurgence in the south and an early harvest in Tarrazu, which saw the country post a 26% increase in production compared to December 2018. Forecasts for all Tico producing regions are optimistic, save the West Valley, which remains a worry due to poor fruit development. Reportedly up to 70% of the 2019/2020 crop had already been sold by the end of 2019.

Happy New Year and we’ll be back next month with the January market report!