Welcome to DRWakefield’s May Monthly Market Report. Lockdown life continued across the globe but we did see the shoots of recovery in nations that had reacted to the virus quicker than others. The UK was one of the worst European nations affected and it was heavily criticized in the international press for its muddled response to the virus. Boris Johnson’s most senior advisor, Dominic Cummings, was also in the spotlight for his actions during lockdown and whether or not he broke lockdown rules. In the US, a 46-year-old black man called George Floyd was killed by a police officer, sparking action the world round to stand up against violence and racism towards black people. The US Dollar lost value against some key currency pairs as protesting continued.
In sport, football fans were left wondering if they would see any Premier League action before the start of next season and many tuned in to watch the reopening of the Bundesliga. Perhaps the Bundesliga might have a new UK fanbase as a result? In coffee producing origins, the coffee flow picked up as measures that were put in place to combat Covid-19 were eased: attention is now centred on demand in coffee consuming nations. The ICO estimates production in 2019/20 to be at 167.91 million bags, which could exceed consumption by 1.85 to 3.42 million bags, depending on the impact of COVID-19.
This month we head to Costa Rica, Kenya and Vietnam for more in depth updates.
During the second half of April we saw a steady downtrend from 120 c/lb to 105 c/lb. Going into May, the big question was ‘will we see the 100 c/lb level tested’? Psychologically, this has always been a big support level. As you can see from the graph, during the first couple of weeks of May, the market tracked upwards and on the 8th of May, hit the month high of 110.10 c/lb. However, over the course of the month the New York market fell by 6.9% to an average of 107.54 c/lb. As a result, the spread between Arabica and Robusta coffees narrowed to 52.87 c/lb, 13.5% lower than in April. Many studies released outlined how a reduction of global GDP would have a significant impact on coffee consumption-this produced many bearish outlooks and the looming supply bonanza that is expected in Brazil only reinforced this view. This dominated the narrative in the second half of the month. The last day of the month was the biggest daily range of (4.65 c/lb) and also the lowest close, winding up May at 95.85 c/lb.
The specs maintained their net long position throughout most of May, but nearly went short at the end of the month. They registered a net long position of 3,638 on the 5th of May and cut it back to 47 lots long on the 26th of May. Open Interest increased by over 14,000 lots from the penultimate COT to the final COT of the month; it appears investors are taking notice of coffee again and are on the fence regarding where this market is headed.
Certified Arabica stocks decreased by 2.8% month-on-month to 2.05 million bags in May 2020, which was the fourth consecutive month of decline. If Brazil is indeed to have a record mega crop, and we see more draw downs in June and July, perhaps certified stocks will be able to soak up a decent amount of volume from the upcoming crop?
Last month was the lowest monthly average price for Robusta since June 2006. May was another tough month for the London market. The highest close of the month was 1,207 $/mt on the 25th, and May closed out at 1,169 $/mt, 25 $/mt worse off than the end of April.
GBP/USD kicked off the month trading at 1.254. As COVID-19 continued to spread in the USA, many UK importing businesses opined that we could be heading back to the 1.30 level. However, as you can see from the graph above, this was not to be. £ Sterling continued to lose value against the US Dollar, reaching a month low of 1.210 on May 15th. Much focus centred around the levels of debt mounting as a result of government support for businesses due to COVID-19. Bank of England Governor, Andrew Bailey, reiterated the huge uncertainty surrounding the economic fallout resulting from the virus. The Pound did pull back some value over the days that followed the month’s low, but only to reach a level of 1.224. For the first time on record, the UK government 3-year bond auction recorded a negative yield. The Pound tracked downwards on the 21st but it didn’t break through the 1.216 support level and had a strong last few days, ending the month at 1.241.
GBP/EUR started May trading at 1.141. Like the cable, it lost value at the beginning of the month, but it did have a brief rally. This was down to uncertainty surrounding the future of the Eurozone and the role of the European Central Bank (ECB). The German Constitutional Court ruled that the ECB had gone beyond its remit in its bond purchasing programme. However, even though there was much friction between Germany and the ECB, the impact of COVID-19 on Britain weighed down harder. There was significant downward pressure on the Pound as other European countries indicated they were much farther down the road to recovery than Britain. The Pound depreciated against the Euro and reached 1.115 on May 22nd. It rallied and hit 1.122 on the 26th, before hitting a month low of 1.111 on the 29th.
Big origins: Brazil, Colombia & Ethiopia
Towards the end of the month, the Real gradually started to strengthen against the US Dollar after weeks of devaluation. This was helped by the president of the Brazilian Central Bank stating there was enough foreign currency reserve to shore up the currency and ward off further devaluation. Towards the middle of the month the Real hit a new record low and was close to reaching 6 (5.99) Reals to the Dollar.
Last month we mentioned that Colombia’s exports were down 4.7% for the period October 19 to March 20. In April its shipments fell by a further 26.4%, representing a 6.5% decrease for the period October 19 to April 20. Did the May Mitaca do much to reverse this trend? The numbers are not in yet but it looks like towards the end of the month good volumes were coming into mills.
In contrast to Colombia, Ethiopia’s shipments during October 19 to April 20 increased by 19.2% to 2.04 million bags compared to last year. Africa’s exports increased by 7% for the same period and helped mitigate the 8.6% reduction in exports coming out of South America. Towards the end of the month Ethiopia’s central bank issued a directive limiting cash withdrawals for bank customers in a bid to tackle tax evasion and help institutions manage their liquidity.
Costa Rican harvesting, milling and exports have not been as badly affected as other coffee origins thankfully. Icafe nearly has all the production figures from this crop and it looks like the 2019/20 crop will end above 1.96 million fanegas, 14% up on last year. The previous 3 harvests were all below 1.9 million fanegas. If you look at a 10-year perspective, 2 million fanegas per crop would be considered a good outcome.
Although production figures have not been great over the last 3 years, the producing region of Tarrazu has steadily increased and has helped mitigate the reduced production in other big producing regions like the West and Central Valleys and the South. As we have mentioned in previous reports, favourable weather conditions, planting of new varietals and strong investment at the farm level have seen production in Tarrazu soar. This crop, Tarrazu represented nearly 45% of total production. The other big winner of the 2019/20 crop is the Central Valley. As you can see from the graph below, its production has recovered and many expect more increases in the years to come.
There is a small quantity of coffee still available and much of it is high scoring speciality coffee. Due to Covid-19 many roasters and importers still have a good quantity of micro lots from last season still on the books and there is not much demand for the best of this crop as a result.
What about the next crop? In February the first rains came in strong and caused a flowering much earlier than usual. At the time this was seen as a disaster because the rain knocked off many cherries from the trees from this crop and people were unsure how this early first flowering would affect cherry development for the next crop. At the end of April the ‘first’ rains came and producers were confident that the effects of the February flowering were not too detrimental. It does mean we might see another harvest like this one where harvesting started in December and January however.
The coffee auction in Kenya will next occur in mid-July. We saw a dry May and this has helped the harvesting and drying of coffee cherries for the fly crop. This is important as the climate has become increasingly volatile; climate change has really come to the forefront in Kenyan coffee production over the last 2 years. Rainfall has dramatically increased and more importantly, has become more erratic. The unpredictably of when it will rain and in what quantity is a big challenge for coffee farmers. Periodic flooding has become commonplace and this has led to new challenges for farmers who need a new set of tools to deal with them. The industry expects a favourable fly crop in terms of both quality and quantity. However, flowering for the main crop was not very good so it remains to be seen what effect this could have.
Like in many origins, there were fears regarding availability of labour surrounding the harvest due to Covid-19. However, in the end this was not a big issue with plenty of labour available. The main concern most exporters have surrounds regulatory changes. The government is discussing the centralisation of selling cooperative coffee, with KPCU the mechanism to sell this coffee. KPCU was once the largest miller in the country and there is a strong political movement to revive it. The government would like to give it milling rights and also give it some marketing roles. This is still being debated but could cause quite a shake up, pending the final decision. Efforts to centralise have happened in the past and they failed because farmers ended up subsidising an expensive monopoly. Many farmers remember this situation and although they support government efforts to get them better prices, they are also wary of a return to a KPCU dominated coffee industry. Traders and exporters also fear the impact this could have on the auction and potential losses of traceability.
Coffee producing areas are suffering from hot and dry weather. After a very dry April, there were some rains towards the beginning of May but it was not till the end of the month that enough rain came in to alleviate concerns for stressed coffee trees. At the beginning of the month initial forecasts suggested the 2020/21 crop could decrease by as much as 10-20%. During the final week of May it was thought that enough rain had come in to revise these figures downwards, but concerns remain for how June will pan out. Before the rain came, farmers that were able to had to irrigate twice as much as the previous crop to help their coffee plants survive this period. This of course pushes up production costs and not all farmers had the funds to irrigate sufficiently during this period.
Talking of costs, the low Robusta market has not helped. We’ve been in a persistently low-price climate for quite some time now and this has seen many producers pull up their coffee trees and plant other products. As the market has slid over the past few months, differentials have increased to compensate. Many producers held back selling with the hope this might happen; at the beginning of May, there was 7% more stock still in the hands of producers when compared to this time last year. Tight domestic supply of coffee has helped push domestic prices, which has helped producers get a better price with the middlemen and exporters. With differentials so high, many buyers are asking for their July and August shipments to be brought forward as the current pricing for new contracts is too high for them. During the period October 2019 to April 2020 were down 3.3% when compared to the same period the year prior. With Indonesian Robusta exports down and hampered by Covid-19, this could further push up differentials coming out of Vietnam.
Thanks to Josphat Mburugu, Duong Hoanh Anh, and Sébastien Lafaye for their updates this month.
Till next time coffee folks!