Coffee Sharply Higher on Dryness in Brazil and Record Low Robusta Inventories

March arabica coffee (KCH24) on Tuesday closed up +4.75 (+2.51%), and Mar ICE robusta coffee (RMH24) closed up +61 (+1.86%).

Coffee prices on Tuesday rallied sharply, with arabica climbing to a 1-month high and robusta posting a new contract high.  Excessive dry conditions in Brazil may damage coffee crops and support arabica coffee prices.  Somar Meteorologia reported Monday that Brazil's Minas Gerais region received 25 mm of rainfall in the past week, or 53% of the historical average.  Minas Gerais accounts for about 30% of Brazil's arabica crop.

Meanwhile, low coffee inventories are bullish for prices.  ICE-monitored robusta coffee inventories Tuesday fell to a record low of 2,996 lots.  ICE-monitored arabica coffee inventories fell to a 24-year low of 224,066 bags on November 30 and were modestly above that at 250,569 bags as of Tuesday.

An increase in Vietnam's coffee exports is bearish for robusta prices after Vietnam's General Statistics Office on Monday reported that Vietnam's Jan coffee exports rose +47.6% y/y to 210,000 MT.  Vietnam is the world's largest producer of robusta coffee beans.

Coffee buyers are shunning robusta bean purchases from Vietnam as shipping costs and delivery times have surged due to attacks by Houthi rebels on commercial ships in the Red Sea, which has prompted some of the world's main robusta coffee buyers to reduce bean purchases from Vietnam and secure more robusta supplies from Brazil.  

Tight robusta coffee supplies are bullish for prices.  Vietnam's General Department of Customs reported on January 10 that Vietnam's 2023 (Jan-Dec) coffee exports fell -8.7% y/y to 1.62 MMT.   Also, Vietnam's agriculture department on November 3 projected Vietnam's coffee production in the 2023/24 crop year could drop by -10% to 1.656 MMT, the smallest crop in four years, due to drought.  Meanwhile, the Vietnam Coffee Association on December 5 projected that 2023/24 Vietnam coffee production would fall to 1.6 MMT-1.7 MMT, down from 1.78 MMT a year earlier.  

A bearish factor for arabica was last Thursday's projection from Conab, Brazil's crop forecasting agency, that Brazil's 2024 coffee production would climb +5.4% y/y to 58.1 million bags.  The 2024 coffee crop year is seen as the most productive of Brazil's biennial coffee year cycle.

A bearish factor for coffee prices is increased coffee exports from Brazil.  Exporter group Cecafe reported Brazil's Dec green coffee exports jumped +31% y/y to 3.78 million bags.  Also, Brazil's Trade Ministry reported Brazil's Dec coffee exports (not roasted) jumped +33.7% y/y to 244 MMT.  Brazil is the world's largest producer of arabica coffee beans.

An increase in global coffee exports is negative for prices after the International Coffee Organization (ICO) reported on January 3 that Nov global coffee exports rose +4.1% y/y to 10.61 million bags and Oct-Nov coffee exports rose +3.1% y/y at 20.25 million bags.

This year's El Nino weather event is bullish for coffee prices.  An El Nino pattern typically brings heavy rains to Brazil and drought to India, negatively impacting coffee crop production.  The El Nino event may bring drought to Vietnam's coffee areas late this year and in early 2024, according to an official from Vietnam's Institute of Meteorology, Hydrology, and Climate Change.

In a bearish factor, the International Coffee Organization (ICO) projected on December 5 that 2023/24 global coffee production would climb +5.8% y/y to 178 million bags due to an exceptional off-biennial crop year.  ICO also projects global 2023/24 coffee consumption will rise +2.2% y/y to 177 million bags, resulting in a 1 million bag coffee surplus.

The USDA's Foreign Agriculture Service (FAS), in its biannual report released on December 21, projected that world coffee production in 2023/24 will increase +4.2% y/y to 171.4 million bags, with a +10.7% increase in arabica production to 97.3 million bags, and a -3.3% decline in robusta production to 74.1 million bags.  The USDA's FAS forecasts that 2023/24 ending stocks will fall by -4.0% to 26.5 million bags from 27.6 million bags in 2022-23.  The USDA's FAS projects that Brazil's 2023/24 arabica production would climb +12.8% y/y to 44.9 mln bags due to higher yields and increased planted acreage.  The USDA's FAS also forecasts that 2023/24 coffee production in Colombia, the world's second-largest arabica producer, will climb +7.5% y/y to 11.5 mln bags. 

More Coffee News from Barchart

On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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