Welcome to the May market report. Royal wedding aside, rules & riots dominated the month with delays coming out of multiple origins. We head to Nicaragua, Tanzania and Colombia to see what’s happening in the world of coffee.
New York closed the first day of the month at 124.80 c/lb, and the final day of the month at 123.70 c/lb. However, this 1.1 c/lb spread does not indicate it was a stable month. The market fell and on the 15th May it closed at a month low of 116.95 c/lb, broadly trading in the 117-119 levels for a few days before climbing again. With the political uncertainty and the lack of a standout candidate in the upcoming presidential elections, the Brazilian real weakened significantly. This drew in further selling and was one of the major factors for the fall in the first couple of weeks. There was a brief cold weather spell observed in Brazil, but it did not have much effect on the market.
The physical Robusta market in India remained tight, with differentials on an upward trend. A Bloomberg survey (a poll of 11 industry participants) showed that Vietnamese growers have sold around 80% of the remaining crop, compared to 85% this time last year. Focus remains on Conilon and if significant volume of that will leave Brazil. It’s a bumper crop and if a big part of that comes to the board in London, that will impact LIFFE in a way we have not observed for quite some months. Jul-18 closed the month at 1752 $/mt.
2018 has been characterised by serious swings in the FX markets, particularly with GBP/USD. The pound started the year by posting its best quarter against the greenback since 2015 (1.36), continued to rise to pre-Brexit cable levels, before finishing the month in the 1.32-1.33 region. Narrative surrounding the greenback is dominated by the (faux?) trade war between the US and China. Hefty tariff figures are being thrown around, but as we all know, Mr. Trump always goes in aggressively at first and then comes to a compromise, as outlined in his book ‘The Art of the Deal’.
Time to talk about Brexit. What true currency report would not mention it? Well, progress has been made in the quest for a smooth Brexit withdrawal agreement between the EU and the UK. The main stumbling block remains, but no answer is straightforward with regard to Northern Ireland and its place in the customs union. However, this looks easy compared to the task of Sergio Mattarella and the formation of an Italian government. GBP/EUR finished the month trading in the 1.12-1.
Big origins: Brazil, Colombia & Vietnam
During the penultimate week of the month, in Brazil a truckers’ strike started in protest against the high prices of fuel and taxes. This stopped nearly all cargo traffic across the country, both internally and externally. Highways were gridlocked and containers struggled to arrive or leave the various ports across the country. Consequently the majority of exporters were unable to ship anything, leaving many roasters worrying about how much contracted Brazilian coffee they have in Europe. Cecafé, the exporters association, made a statement at the end of the month indicating the protests caused financial losses estimated at 560 million reais ($149.99 million) in lost export sales and additional port costs.
In the first round of Colombia’s presidential election, Iván Duque, a conservative former senator, took 39% of the vote and will face Gustavo Petro, the left’s candidate, who got 25%, in the second round on 17th June. Mr Duque is aligned with Álvaro Uribe, a former president and critic of the peace deal with FARC guerrillas. Mr Petro used to belong to a separate armed group. Whoever wins is likely to make a big change to the direction the country is going in.
Heavy showers at the end of the month in the Vietnamese central highlands aided cherry growth, with similar showers observed in Sumatra and Java. Many importers have their fingers crossed that this will ensure the main crop later this year will be good.
April was a turbulent month for Nicaragua, and thankfully the situation improved in May. Politics continue to dominate the headlines, but its impact on internal infrastructure and containers leaving port has abated. Burnt tires have been cleared and the coffee is now back on truck, so to speak. Exporters are still hesitant and are paying very close attention to the movement of their coffee, working in close collaboration with trucking companies and shipping lines. Daily updates on roads is the reality on the ground. Will the peace last? Everything kicked off because of the president, Mr Ortega, imposing a decree of a 5% cut in pensions and an increase in contributions. A degree of calm only returned because he cancelled the decree. The problem is that the government is short of funds and has to find them somewhere. With an angry population, this will be difficult. The Catholic Church is trying to broker a dialogue between the government and private business lobbies, but this had not yielded anything of note to date.
The harvest this year started early in Nicaragua and the rains have been as turbulent as the politics. Many people hope for a better 2019, in coffee and in the wider socioeconomic sense in Nicaragua.
A raft of regulatory changes will kick in for the 2018/2019 crop. We saw politics having a negative influence in our Nicaragua feature, and time will tell what its influence will be in Tanzania. The idea is that the upcoming changes will give farmers a better farm gate price and will involve them more in the supply chain. The key change is that farmers are obligated to sell cherry or parchment to an Agricultural Marketing Cooperative Society (AMCOS) who will deliver the coffees to auction. This improves traceability as all coffee will be traceable to the relevant AMCOS, and it also means that private buyers and other industry players will not be able to buy directly from farmers. The AMCOS will be regulated in a way which private buyers in the past were not. To what degree remains uncertain. Much of the regulation is nebulous, which makes it difficult to draw conclusions at this stage.
What is certain is that there is an effort by the government to improve the lot of farmers. There are likely to be teething problems, as with all new systems. So be patient as it might cause delays for the first few shipments out of Dar Es Salaam! Back to current crop though. The last auction occurred on 3rd May, most of which was under grades, with a small quantity of main grades coming from the Kilimanjaro area.
The Southern Colombian fly crop (mitaca) has been delayed. It was expected that the harvest would be in full swing by the middle of June but there is still a great deal of cherry development and harvesting to occur. There is more coffee than expected still to offer. The departments Huila, Nariño and Cauca are behind this drive. Although weather has been favourable in the South, one cannot attribute robust growth in production and output just to that. The cost of production is lower in the South due to cheaper labour and cheaper land than Northern departments. This makes it attractive for other products too. Cocaine production remains a challenge in the coastal areas of Nariño, especially Tamuco, where easy access to the coast makes it particularly attractive to drug traffickers.
Increased coffee production in the South is welcome news, as the ‘Eje Cafetero’ has not had the best year, especially with production in Antioquia much lower than first predicted. In certain producing areas there is simply no coffee where usually it is in abundance. That is not the only challenge there. Land devoted to coffee is decreasing as competition from other products such as citrus and avocado is making farmers reconsider the viability of coffee. Coffee tourism is also a big growth area, with some farmers seeing this as a more lucrative way of earning money from coffee.