Coffee futures recovered from recent lows, as reports of early flowering spurring worries over “growing risks” for Brazil’s 2020 output, amid continued reports of a lower-quality 2019 crop too.
Arabica futures for December - which in the last session touched a contract low of 93.40 cents a pound, only to end higher – added a further 1.6% to 96.80 cents a pound in late deals in New York on Wednesday.
London robusta coffee futures for November, which last week set their own contract low of $1,287 a tonne, stood at $1,332 a tonne, up 0.6% on the day.
The headway came amid a growing market focus on reports of an unusually early arabica tree blossoming in parts of Brazil, some as early as last month, and of failed flowering in some robusta plantations.
‘Risk that flowers abort’
Marex Spectron, noting an early flowering in Sul de Minas, in the south of Minas Gerais, Brazil’s top coffee-growing state, said that “about 25% of the area has been affected.
“It there are no follow-through rains over the next four weeks, there will be a risk that these flowers abort and production lost,” the trading house said.
And in fact, “high temperatures… are forecast for September”, said Commerzbank, adding that “blossoms could be shed” if this forecast materialises, “which would reduce the potential yields”.
Already, in the robusta-growing state of Rondonia, some early flowers “were burned” by high temperatures, Brazilian research institute Cepea said, although it reported good blossoming conditions in the key state of Espirito Santo.
El Nino – again?
Commerzbank - noting “growing risks for” Brazil’s 2020 coffee harvest, and “increasingly negative reports” on the crop – flagged too ideas of a residual setback to some trees from frosts, as well as dryness.
“The unsettled weather and an extremely cold July have apparently damaged many trees.”
Furthermore, there was, according to Brazilian weather institute Inmet, the threat in early 2020 of another El Nino weather pattern setting in.
“This may be accompanied by too little rainfall and above-average temperatures, or even extreme heat,” Commerzbank said.
‘Considerable price recovery potential’
With the 2019 crop proving “not quite as good as had been expected”, and with speculators having built a substantial net short in arabica futures and options, the stage could be set for a price recovery.
“If sentiment were to turn, this would give rise to considerable price recovery potential,” the bank said.
“We believe this is not unlikely given that many observers are expecting to see a deficit on the global coffee market in 2019-20, generally of the order of 3m bags.”
Marex Spectron restated ideas of price support from foreign exchange markets, saying that its analysis of currency moves implied that the arabica market “is fundamentally oversold, and should correct upwards in the short term”.
Trading to pick up
Cepea, meanwhile, was more cautious on its Brazilian market assessment, saying that while roasters “may become more active in the market now”, as seasonally cooler northern hemisphere temperatures boost demand for hot drinks, growers may become more willing sellers too.
“Farmers may need to make cash flow,” to pay for fertilizers and other crop inputs for plantation management practices “conducted before and after flowering”.
After a quiet start to this month, both buyers and sellers “should return to the market more actively between late August and September”.
Arabica vs robusta prices
In fact, prices of robusta coffee have proved stronger in Brazil so far this month, adding 2.5% to R$281.45 per bag as of Tuesday, compared with a 0.8% gain to R$405.93 per bag in values of arabica beans, Cepea data show.
On Monday, the robusta discount to arabica fell to a two-month low of R$120.14 per bag.
Nonetheless, the institute stressed the lower quality of this year’s Brazilian arabica crop, blaming harvest-time rains which compromised the drying process, besides knocking some beans from trees.
The coffee berry borer insect pest has also “been a problem, largely in the Zona de Mata area” of Minas Gerais.