It took longer than most people would have liked but the US-Presidential elections results finally came in. After a tense few days it was announced that Donnie got Trumped by Joseph, the man who has been long been Biden his time. It took three attempts, but the Democrat Leader has now been announced as President-Elect of the 46th office, and will become the oldest US President in history. With the first ever female Vice-President, Kamala Harris, they have pledged to tackle the pandemic and restore the soul of America. Commodity markets will feel the effect of this political shift to the left as analysists take a bearish stance on the Dollar Index. In the past a weaker greenback has seen a raised demand for hard and soft commodities.
In the UK retail doors closed once again as the country, and much of Europe, went back into lockdown. Hopes of an uninterrupted Christmas period slipped away as talks of a stricter tier system came into play after lockdown ended. A five day break has been granted allowing people to travel over the festive period and the positive news of a potential vaccine has rallied some positive sentiment that progress is being made.
Sport saw the all new Rugby Autumn Nations Cup kick off and Scotland beat Serbia on penalties to claim their spot in the Euros held in 2021. Lewis Hamilton crossed the line of the Turkish Grand Prix to equal Michael Schumacher’s record of seven world Championships in the same month he also claimed the top spot of the Powerlist as the most influential black person in Britain. November was also the month the world said farewell to one of football’s most recognisable stars, Diego Maradona.
The reports for the 2019/2020 coffee year were released from the ICO who quoted a total production of 168.84 million bags, down 2.5% year on year but consumption only dropped 0.9% to 167.59 million bags, which despite the circumstances seems rather remarkable. This continues the surplus supply trend of the last five years.
This month we step into Honduras, Brazil, and Uganda for a more detailed investigation.
The above graph is for the March 21 Terminal Month. November started a bit higher than the infamous $1 level at 105.40 c/Ib. The first couple of days saw it trade sidewise and dip to the month low of 104.85 c/Ib before beginning a sustained climb for a large portion of November. Open Interest increased from the October levels from 331,189 to 342,440 but then reversed and fell to 293,903 lots by the last COT report published. The commercials increased their net short position over this same time period to round out at -82,464 lots, a change of 12,170.The first week saw a brief net short for the Specs (-304 lots), the first time since July, but went back to old ways the week after and closed out by the 24th at 15,230 net long. The 16th saw a sizeable leap from 112.80 c/Ib to 119.30 and closed on 118.75 c/Ib. Much of this rise can be put down to the American election news and the prediction that the USD index will fall under the Biden administration. Other factors also named were the positive news of a Covid-19 vaccine and the damaging hurricanes making their way through Central America and the potential negative impact this could have on the production figures. A few more days of this upward trajectory saw the NYC climb above 124 c/Ib. But as Newton once said, what goes up, must come down, and the 20th saw it drop over 7 cents to 116.75 c/Ib but rally to close on 118.05 c/Ib. The reason for this was mixture of a weakening BRL and the situation in Central America beginning to clear up. A break for Thanksgiving seemed to give the market a booster injection and out the other side we hit the month high of 124.80 c/Ib on the 27th. November ended a tad lower at 123.30 c/Ib. Total certified stocks rose from 1.15m bags to 1.24m bags over the month.
The Relative Strength Indicator at the beginning of November toed the line seen throughout October and half of September, peaking and troughing around the 40 mark. Following the market upwards in the latter half of the month it tipped over 70 indicating that the market was overbought. It promptly fell back down coinciding with a dropping Open Interest.
Certified Robusta stocks increased through the month as gradings accumulate four times faster than stocks are being drawn down. Kicking off the month prices started out at 1,344 $/MT reaching a high of 1,444 $/MT and dropping to 1,401 $/MT to finish. This is down by 1000 $/MT from this time in 2019 but a substantial increase from the September levels. As for farmgate prices in Vietnam, Robusta edged slightly higher for a second week in a row at the beginning of the month to 34,000 VND/kg but marginally retracted back to 33,200 VND/kg. Conilon sat at 405 BRL/bag throughout. Total Open Interest rose from the beginning of November of 123,969 to 130,586 and back down to 121,804 lots by the last COT report of the month.
A bumpy start to the month caused by delayed US election results saw an initial fall to a month low of 1.291 but this soon gave way to a pleasant upturn in the value of the Pound against the Dollar reaching 1.327 on the 10th. The news of a boost to the UK quantitative easing program of £150bn to help with lockdowns and a potential vaccine prompted this, as well as a drop in the Dollar Index. Brexit jitters saw a two day downturn ensue, to reach a level of 1.319 before beginning the march back up on the 12th. The strengthening of the Pound continued (almost) uninterrupted until the 24th peaking at 1.338, carried by encouraging vaccine and Brexit news. The Chancellor announced the spending plans for the UK which despite a weak dollar caused Sterling to fall and slide to finish at a respectable 1.332.
Sterling reached a two month high against the Euro on the 3rd on the back of the news that a Covid-19 vaccine may be ready soon. This did not last long and it fell back to 1.108 over the course of the next day as the impending second lockdown loomed closer. Hopes of positive Brexit discussions and an extension to the UK furlough scheme then saw it rocket up to 1.123 to claim a new two month high. In the typical fashion Brexit caused it to go back down again and it returned to more familiar levels by the middle of the month. A volatile week saw the GBP make net gains against the Euro and for the third time in November set a new two month high of 1.125 on the 23rd. Edging slowly down Sterling maintained comfortable levels up until the 26th November. It seems fisheries are important business with this remaining as one of the key sticking points in the Brexit negotiations and a reason why the value of the pound fell to 1.113 before gaining slightly to see itself out at 1.115.
Like the Pound the Euro started low against the greenback and increased in value for the initial few days as Biden taking the Oval Office looked more and more likely. The 6th saw it tip over the 1.187 before bouncing down to 1.177 and wind its way back up to 1.187 again on the 20th. The hope of a stimulus package for thus economy drove down the value of USD further as traders indulged in higher risk currencies. The 27th saw the EUR/USD peak at 1.196 and close out on the 30th at 1.195.
Big origins: Brazil, Colombia & Vietnam
This years’ Brazil crop is standing out in terms of quantity and quality. Before 2020 Brazil had only pushed upward of shipping 4 million bags in a month once, November made it three in a row. Some estimates have been raised to 50 million bags of Arabica for the 20/21 crop year. Semi-washed Brazils have now replaced Peru and Mexico to become the largest origin in the Arabica certified stock. The weather in Brazil has seen a drier than average November, a time when rains are necessary. So far it is said that it is too early to predict what impacts this might have on the next crop. The Brazilian Real has been losing value against the dollar since March 2018 and is hovering at the 5.34 mark but diffs have remained somewhat unchanged at -27 for GC and -20 for FC.
Colombia saw a lower than expected output in the first month of harvesting. Production has fallen by 15% from 2019 to 1.16 million bags in 2020. Exports from the beginning of the 20/21 season have also got off to a slower start than this time last year. Sources differ with their prediction for this year’s crop. Forecasts made earlier in the year predicted a 3.4% decline in production in 2021/22, on the back of adverse weather hampering the development of coffee beans, but others say these problems were marginal and in fact the number of bags from Colombia will increase from 13.9 million bags to 14.2 million bags in both 20/21 and 21/22 crop years. This will return to the level of 2018/19.
In Vietnam, coffee production has been exceptionally high in recent years. It is expected that there will be a moderate decline in production in 2020/21. The harvest rate increased during the month to make up for the initial delay but the end of November the origin was still only around 10% behind the usual, which amounts to about a 3-4 week delay. The forecasts of heavy rains are likely to continue to delay this. The World Meteorological Organisation has stated that there is likely to be a moderate to strong La Niña weather phenomenon in the coming months; this is characterised by a fall in Pacific Ocean water temperatures, typically disrupting coffee production by bringing heavy rains to many of Asia’s coffee producers and drought to most Latin American producers.
The Honduran news last month was dominated by the arrival of two Hurricanes, Eta and Iota. Torrential rainfall and high winds caused flooding and mudslides throughout the country resulting in a number of deaths. Many low lying areas experienced damage to infrastructure like roads, bridges and airports. All access points to San Pedro Sula, the country’s second largest city, were closed down for safety measures due to high levels in rivers and flooded roads. According to IHCAFE, Tropical Storm Eta only affected around 1.2% of the nation’s coffee production, since the majority of coffee regions are in high altitude areas, away from large rivers and the sea and it is the beginning of the harvesting season. Although reports from some of our suppliers say that transporting coffee from the farms to the mills has been somewhat impeded. Heavy rains are likely to increase the rate at which the coffee ripens potentially causing problems if pickers are not able to reach the farms in time. The repairing of roads and bridges is set to resume as soon as is possible, however it is predicted that internal logistics will pose a challenge for the upcoming crop, especially during the first months of sourcing (December-January) while roads are still under repair.
Coffee production in Honduras has grown a lot in recent years, placing it in 2019 as the 5th largest producer in the world, just after Indonesia. Some sources predict that in 2020-2021 it will become the 4th largest. For the 2020-2021 harvest, it is estimated that production will increase in some areas by up to 35% but in the country as a whole by 14%, a total production of 8.2 million 46kg bags is estimated. Of course ongoing effects from the hurricanes may change this.
Over the last 3 months the Honduran Lempira has been very volatile but of recent has gained a few cents in the country’s favour. Prices in the local market are often subject to competition as pressure from some neighbouring countries that are short and need to fulfil their contracts look to buy stocks
The quality of the coffees from the 2020 harvest was extremely high. Proof of this came the Cup of Excellence Brazil, held in November, which recently announced the 30 best Brazilian specialty coffees of the year. The first place received the score of 90.03, showing that even in this atypical year, the Brazilian producers strived to achieve their best. Fazenda Monte Alto, a SMC Specialty Coffees producer partner took third place, with a grade of 88.94.
A period of drought suffered in the main coffee producing regions of Brazil during the flowering season in September and October caused concerns that it will be harmful to coffee trees. The situation has been called the “hydric crisis” because of the percentage of soil moisture. At the end of September, the water content was 2x lower than in 2019 at the same period and the concern throughout October was the same. November proved slightly better receiving rainfall in the latter two weeks but some producers fear that it has not been enough to make up the deficit as cumulative rainfall is still below the historical average.
Because of the volatility with the Brazilian currency and combining this with the drought, it is not known yet how and if the quantity and quality will be affected for next season. To further add to this, after the high volume harvest many producers carried out substantial pruning of their trees, which many expect to result in a 30% drop in production for next year. For now, producers are choosing not to market for the upcoming crop and wait for the situation to progress.
Brazil is still struggling with the global pandemic and has confirmed over 170,000 deaths. It is still showing an upward trend of this key figure but as of yet there is still no sign of introducing more stringent measures to control it, such as lockdowns.
Uganda, an origin that hasn’t been featured in our Monthly Market report before, is deep in to its main Arabica harvest of the year. This east African nation has four arabica growing regions with the two largest being Mt. Elgon in the east on the border with Kenya, and the Rwenzori Mountains in the west, on the border with the Democratic Republic of the Congo. In the past tradition has stipulated that the Rwenzori’s produce naturals, dried in the farmers back garden. This is known as drugar (Dried Ugandan Arabica) and has earned itself a somewhat negative reputation over the years. Those in Mt. Elgon have mainly indulged in wugar (washed Ugandan Arabica).
The harvest runs from September to December which also coincides with the long rainy season which this year is proving to be average. The majority of the roads into the mountains are mud, meaning rain causes significant difficulties for the farmers who often have to bring the cherries down by foot to the washing stations on the lower levels. Harvesting for the main crop in the low altitudes is finished; but the high altitudes are on going. The quality has been of a high standard so far.
Nowadays farmers in the Rwenzoris are being discouraged away from drying the coffee themselves and instead selling the cherries directly to cooperatives and other companies to process as either natural or washed. This means a lower risk of spoilage and a quicker cash flow for the farmer as each day they supply fresh cherries they get paid, rather than having to wait it to dry before taking it to market. To bolster the advantage of selling cherries, a higher price is offered for red cherries (when out turn is taken into consideration). Let me explain. At the time of writing a kilogram of red cherry would fetch 1,350 Ugandan Shillings (UGX) and a kilogram of drugar 5,800 UGX. Now, assuming that it takes around 6.5 kgs of cherry to produce 1 kg of drugar the same value of cherries is worth 8,775 UGX compared to 5,800 UGX. The main disadvantage to farmers of this system is that they would have to make recurrent trips to their local buying centre throughout the season which potentially could be several miles away.
Uganda is in its election period and campaigns are happening around the country. The situation is of late tense as political parties are not allowed to hold rallies and some presidential candidates have faced arrests while others have had some of their campaign schedules cancelled by authorities. Incidences of protests against arrests of political candidates and subsequent actions of security operatives against protestors have been occurring. Although the situation is tense, it is stable.
Our thanks go out to Delmy Regaldo, Priscila Castro and Simon Okiror for their contributions this months.
Until next time folks.