Coffee Closes Higher on Dry Conditions in Brazil

July arabica coffee (KCN22) on Thursday closed up +2.05 (+0.95%), and July ICE Robusta coffee (RMN22) closed up +57 (+2.81%).

Coffee prices Thursday recovered from early losses and posted moderate gains.  Fund short-covering emerged Thursday after weather forecasts called for excessive dryness in Brazil to extend through the end of this week.  Dry weather in Brazil supports coffee prices after Somar Meteorologia reported Monday that there was no rainfall in the Minas Gerais area last week, an area that accounts for about 30% of Brazil's arabica crop.

Early Thursday, arabica fell to a 4-week low, and on Wednesday, robusta dropped to a 1-1/2 month low as coffee supply concerns eased.  Citigroup Wednesday projected that the 2022/23 global coffee market would shift to a surplus of +3.5 mln bags from a 2021/22 global coffee deficit of -7.3 mln bags.  Weakness in the Brazilian real (^USDBRL) is also bearish for coffee prices after the real today fell to a 1-1/4 month low against the dollar.  A weaker real encourage export selling from Brazil's coffee producers.

The war in Ukraine has sparked coffee demand concerns on fears that Russia's invasion of Ukraine will lead to faster inflation, curb consumer spending, and reduce coffee consumption as consumers tighten their belts and limit their visits to restaurants and cafes.

In a bearish factor, the Green Coffee Association last Monday reported that U.S. March green coffee inventories rose +1.0% m/m and +2.5% y/y to 5.82 million bags.

Increased supply from Vietnam is bearish for robusta prices after Vietnam's General Statistics Office reported on Mar 28 that Vietnam's Jan-March coffee exports jumped +19.4% y/y to 541,000 MT.

Coffee prices have seen downward pressure from a rebound in coffee inventories after ICE-monitored arabica coffee inventories rose to a 2-2/4 month high Mar 25, and ICE robusta inventories climbed to a 3-1/2 month high.  ICE coffee inventories have recovered after arabica inventories last month posted a 22-year low, and ICE robusta inventories posted a 3-1/4 year low.

Concern about tighter global supplies is supportive of coffee prices.  On Apr 11, Brazil's coffee export council, CeCafe, reported that Brazil's Mar green coffee exports fell -by 5.8% y/y to 3.267 mln bags.  Also, Colombia, the world's second-biggest arabica producer, reported on Apr 5 that its March coffee production fell -by 13% y/y to 914,000 bags.  In addition, the International Coffee Organization (ICO) on Mar 31 reported that global coffee exports during Oct-Feb fell -by 0.8% y/y to 53.2 mln bags.

Signs of tight global coffee supplies are bullish for prices and pushed arabica coffee up to a 10-1/2 year nearest-futures high on Feb 10.   The International Coffee Organization (ICO) recently cut its global 2020/21 supply estimate to a deficit of -3.13 mln bags from a previous estimate of a +1.2 mln bag surplus.  In addition, ICO lowered its global 2020/21 its global 2020/21 coffee production estimate to 167.17 mln bags from 168.88 mln bags and raised its 2020/21 global coffee consumption estimate to 170.30 mln bags from 167.68 mln bags.

Arabica coffee prices are seeing support from expectations of lower global supplies due to unfavorable weather and supply chain disruptions.  Drought and recent frost events have devastated Brazil's coffee crop this year and have curbed the growth potential for the country's coffee crop for the next two years.  Conab reported Dec 16 that Brazil's 2021 arabica coffee production fell to 31.4 mln bags, down -36% from 48.8 mln bags in 2020.  The USDA's FAS projects that Brazil's 2021/22 coffee exports would tumble by -27% y/y to 33.2 mln bags from a record 45.67 mln bags in 2020/21 as drought and frosts curbed coffee production.  However, Conab on Jan 18 projected that Brazil's 2022 coffee production would recover by +16.8% y/y to 55.7 mln bags.