Welcome to DR Wakefield’s July Monthly Market Report. This month saw the easing of lock down restrictions in the UK and the return of the people to their beloved pubs, as well as with the advice to travel to Spain granted, and subsequently taken away again. The Tokyo Olympics failed to go ahead but the longest ever Premier League season, lasting 50 weeks, concluded with Liverpool, unsurprisingly, as champions.
Covid-19 continued to dominate the headlines and much of everyday life. Its effects were felt in economies all over the world but perhaps none more significant than that of the US. The Pound made gains against the Dollar due to a sizeable shrinkage of the American economy and it climbed to back above the 1.30 mark but remained broadly the same against the Euro. All coffee groups saw an increase in average price, but global exports declined by 5.3 % from June 2020. A statistic released stated that Starbucks represents 37% of coffee shops in the USA, with Dunkin’ Doughnuts taking second place with 26%. This came out in the same month that the company saw a 10% boost in sales for Starbucks branded products.
This month we head to Guatemala, Brazil and Colombia for more detailed information.
NYC Market
The gains made in late June to bring the NYC above the 100 c/Ib mark were quickly undone as for the first two thirds of the month it sat low, flickering back and forth over that crucial line. Warm weather projections in Brazil eased producer fears but gave no reason to think supply might be an issue. The month bottom of 96.30 c/Ib occurred on the 15th July.
The first half of the month showed a low level of volatility with the market trading sideways and a number of inside days occurring. Often these can indicate an upward change, which, coinciding with a rise in the number of open interest bringing new money into the market, ensured that the 22nd of July saw the largest movement of the month from 104.05 to 111.45 c/Ib. This marked a two-month high. Apart from a couple of brief dips the market tracked upwards for the remainder, to end on a closing high of 121.60 c/Ib. This rally was primarily due to speculative short covering encouraged by the news that Brazil could go through a cold weather period at the start of August. The weakening of the US dollar also helped to drive the market up.
The volume of open interest rose from 322,686 to 331,035 from the 14th July to 28th July as non-commercials reduced their number of shorts by 16,191 and went long by 1,119. Over the same time frame the commercials increased their shorts by 11,937 and reduced their longs by 6,998.
Robusta
Speculation continued around this year’s increase in Robusta production. In Vietnam, a large proportion of the crop has already been sold, with a number of months before the arrival of the next crop. India, although struggling to cope with the pandemic, is demonstrating signs of improvements. Much like the Arabica crop in Brazil, the Robusta harvest is also going slower than the equivalent time period last year. Production estimates hover around a 0.5% increase from the 2018/19 crop year to 72.63 million bags. The London Robusta price increased by 15% to 1498 $/MT. Demand for Robusta is growing with a movement towards instant drinks easily prepared at home.
Currency
GBP/USD
The month kicked off at 1.244 with Sterling strengthening against the Dollar as positive data released by the UK Government indicated that the economy is starting to improve. This upward trend continued to reach 1.262 until the 10th of July which saw the first significant drop back down over the next four days to 1.255. This middle period of the month saw it bounce between the previously stated level and 1.258 until the 17th when it began to climb over the next fortnight. This rise was not so much due to the strengthening of the Pound but rather the fall of the dollar as Covid-19 weighs heavy on the US economy. This is outlined by the blue box on the graph, as over the same time period the value of the Pound rises against the greenback, but falls against the Euro as British progress with Brexit slowed. The main factors influencing the Pound’s value from its own side have been Brexit negotiations and the Bank of England’s decisions to aid economic recovery through means like quantitative easing and interest rates. The cable hit the month high of 1.309 on the 30th July before dipping slightly on the final day.
GBP/EUR
July started with a mediocre rate of 1.106 after inheriting June’s downward performance. Would July be any different? Results of the first few days looked promising as it tracked upwards, however, this was short lived as by the third day Brexit discussions finished a day earlier than planned which prompted a drop to 1.105. Fortunes changed metaphorically and literally on the 6th and by the 9th of July, Sterling reached a three-week high against the Euro of 1.116 as a combination of positive Brexit talks and the re-opening of the leisure and beauty industry gave rise to an uplift in the economy. The weekend saw a swift end to the positivity and by the 14th GBP had fallen past the opening rate and touched on 1.101. The week beginning 20th July saw a drop in the value of the Pound from 1.106 to the month low of 1.096 as EU leaders came to an agreement over the planned recovery package for EU countries struggling with the effects of Covid-19. The final week saw a recovery and it ended the month on 1.115, slightly higher than its opening.
Big origins: Brazil, Colombia & Vietnam
The Brazilian harvest started the month with 48% collected and had only reached 63% by the middle of July, largely put down to the implications of Covid-19 on the workforce. This has the potential to offset the expected glut caused by this year’s bumper crop in the short term. This is aided by the lowest level of carryover stocks since the 2012/13 crop. Nevertheless, the average price of Brazilian naturals which makes up the majority of the country’s crop rose by 5.8% to 97.96 US c/Ib, aided by a rise in the value of the Brazilian Real in the latter half of the month.
Colombian milds average price rose by 4.2%, greater than the other milds which rose by 3.7%, meaning differentials sat above 50 for Excelso. The country shipped a total of 1.13 million bags over the month, bringing the year to date figure 0.42 million higher than the five-year average, recovering well after a slow start to the year. With both June and July showing positive figures it seems the country has overcome the transportation problems caused by the virus earlier in the year.
Rainfall in the Dak Lak region of Vietnam has helped to recover the crop from high temperatures and low rainfall during the crucial flowering period from April to June. Cherry development is fully brought into play in August so good rainfall will be necessary. Farmgate prices didn’t manage to follow the upward patten of differentials. Shipments are estimated to be 0.13 million lower than June and 0.21 million than July 2019.
Focus on
Guatemala
Guatemala has been less impacted by Covid-19 than many other Latin American countries but is only slightly above (2722) the world average (2250) in cases per million. Early and extended sanitary measures – lockdown and curfew measures that took place from March 16th until July 26th – have been helping. The country is being reopened right now so time will tell if it triggers a new peak. Coffee is classed as one of the core agricultural products so has benefitted from fewer restrictions during the pandemic.
Rainfall during this rainy season has been better this year than the previous years and good soil moisture levels in May and further heavy rainfall in June pushed towards a good development for the 20/21 harvest. However, the below average rainfall in July has the potential to undo some of these gains. The rainfall pattern is still being closely monitored for its effect on coffee rust and other fungi.
Crop volume for the 2020/21 harvest is looking similar to last year so far, but shipments in Guatemala were down 80 thousand bags to 2.52 million in the first third of July. The expected quality for Guatemala is the same as last year, although some factors are still unknown like the availability of labour for in between harvest activities and producers’ purchasing power that can influence fertilizing patterns. How the pandemic is going to affect hired labour in cooperatives during the remaining harvest is still unknown. Harvest starts at the end of August for low altitude locations, so they are now in pre-harvest activities. It was already at the end of harvest for high altitudes places when shutdown happened which meant some of the high-quality crop was unaffected. For high altitude areas, where the harvest is over, farmers participated in other activities such as weed management, fertilizing and planting of young coffee trees. There is uncertainty regarding how demand will react to different sanitary measures worldwide and how the economy will pick up in the post-coronavirus era.
Brazil
Cases of Covid-19 in Brazil are still rising and the country has the second highest number of cases in the world, after the USA. Covid has affected the life of the producers in different ways. The constant concern about whether the world will or will not consume as much coffee as usual, especially when it comes to higher quality products, is ever present in the minds of producers. The fluctuation of prices and the lack of workforce for those who depend on it exacerbates this. Producers used to receive clients on site to show and explain their methods and offer their coffees via cupping. Now, with the worldwide lockdown, it has not been feasible and the direct connection between buyers and suppliers is now fully focused on marketing content, with videos, pictures and information sheets.
At this time of year frost is one of the main concerns, mainly in North Parana and South Minas Gerais. Weather forecasts at the start of July indicated a warmer winter diminishing the chances of frosts, putting many producers worries to rest despite the differences between the American and Canadian weather models. Dry weather during July has enabled a successful harvest and good quality.
July is typically the slowest month for shipments from Brazil and the pace of harvest fell behind for the same time on the previous ‘on cycle’ finishing on 78%. However, despite the slow harvest, Brazilian shipments in July reported 0.2 million bags higher than June and 0.4 million higher than July 2019. The rise of the NYC kept the FOB buys at bay somewhat, even with the lower differentials.
Colombia
Colombia, like much of the world is under a state of lockdown, but some key industries have exemptions to many of the rules. Those who work as pickers, truck drivers or in milling plants have the ability to travel freely. Each of the coffee departments has control over their bio-sanitary measures. Local government are working closely with many levels of the value chain from Cooperatives upwards, to work out the best strategies to continue with activities but limit the spread of the virus. The availability of pickers was adequality handled during the mitaca crop, and so the low export figures were put down to impacts on shipping lines, which were still being felt in July.
July saw good weather conditions for cherry development and so the nation is expecting good volume and quality in the upcoming crop. July and August are normally quieter months in the Colombian coffee world, waiting for the main crop to arrive in September. This is compounded with the fact that many importing countries are in their holiday season.
Differentials are sitting at + 50 cts/Ib or over meaning a high price for farmers, which has been aided by the higher dollar to pesos rate, which over the last six months has become the ‘new normal’. Producers were used to one dollar to 3500 pesos, but it now comfortably sits at 3700 pesos.
The overall feeling for the future is one of uncertainty, so exporters and banks have been conservative in their approach to lending money to producers. This feeling of conservatism has been exaggerated by the failure of producers to delivery some contracts at the end of 2019 allowing a backlog to build up. Speculation of market changes is mostly neutral with a somewhat bearish tinge.
Our thanks to Elsy Rios, Priscila Castro and Sebastian Valderruten for helping to provide information for this report.
