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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 77% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Coffee - better fundamental factors, weak BRL

12:22 10 August 2020
Summary:
 
  • The fundamental factors in the coffee market are getting better
  • Waiting for a deficit this season, a sharp drop in inventories
  • The weak Brazilian real causes a sharp pullback in prices
We saw a big improvement in the coffee markets last Wednesday. The prices of both Arabica and Robusta have reached multi-month highs. On the other hand, we saw a continuation of the weakness of the Brazilian real, which started at the end of July and intensified in the middle of last week.
 
New supply and demand forecasts
 
In the case of fundamental factors, however, we have definitely better news. The ICO changes its forecasts and expects a large deficit on the market this season. The 2019/2020 season (October-September) will bring a decrease in coffee production to 168.006 million bags (-2.9% y / y). In turn, consumption will increase by 0.3% YoY to the record level of 168.492 million bags. Therefore, the deficit is expected to be almost half a million bags! This is a huge change, taking into account last year's surplus of 5.136 million bags and the June projection when the ICO expected a surplus of 1.85 million bags. Of course, these are still projections, but in real terms, we observe the surplus of demand over supply through the decline in inventories on the stock exchanges. Inventories monitored by ICE dropped to 1.5 million bags for Arabica (3-year low), while Robusta stocks dropped to a 1.5-year low.
 
The weather supports coffee prices
 
What about other factors? It turns out that the weather factors are not very favorable in the two most important coffee producing countries in the world - Brazil and Vietnam. Vietnam recorded a double-digit decline in exports (more importantly, Vietnam is the producer of Robusta, coffee which is mainly used in homes in the form of instant coffee, i.e. the one for which demand has not suffered during the pandemic, but has also benefited). In contrast, in Brazil, in the Minas Gerait area, current rainfall has fallen to 2% of its historical value.
 
Negative factors
 
Of course, not all factors support a further rebound in coffee prices. Before we move on to the most important one, it is worth mentioning two others. The weather in Colombia is currently very good, leading to an increase in coffee production prospects. Exports are growing on an annual basis in this country. Importantly, this country mainly produces Arabica, i.e. coffee used primarily in the restaurant sector. The second thing is coronavirus. The continued spread of the pandemic is not very good for the demand outlook, mainly for the restaurant sector. It turns out that demand did not suffer much during the pandemic, mainly due to the change of place of consumption from cafes / restaurants to homes, although it is worth mentioning that in this case such a change is primarily good for Robusta. Interestingly, Fitch believes that the increase in consumer spending on coffee this year will amount to 5.8% y / y with the 5-year average of 1%.
 
Brazilian real

Real is currently the biggest threat to the coffee price rally. The weakening of the real makes exporters willing to sell off coffee - the price in dollars (relatively) does not change, and the transaction is settled in this currency. There are opinions that with the real appreciation against the dollar this year, there is a chance that the price will exceed $ 2 per pound! This forecast, however, seems somewhat cut off from reality. Fundamental factors do not support such a monstrous price rebound. Such a forecast would require a significant reduction in supply in the form of an enormous drought or disease (such cases have happened in previous years) or a huge increase in the value of the real. A price of $ 2 per pound would require USDBRL around the 3.00 level.
One can see a huge divergence in the short term between the coffee and the reversed USDBRL pair. Moreover, the weekly chart shows a clear supply signal in the form of a long wick of the candle from the previous week. It is currently visible that coffee may be under pressure in the short term, but in the longer term there are potential prospects for further strengthening. Source: xStation5

This content has been created by X-Trade Brokers Dom Maklerski S.A. This service is provided by X-Trade Brokers Dom Maklerski S.A. (X-Trade Brokers Brokerage House joint-stock company), with its registered office in Warsaw, at Ogrodowa 58, 00-876 Warsaw, Poland, entered in the register of entrepreneurs of the National Court Register (Krajowy Rejestr Sądowy) conducted by District Court for the Capital City of Warsaw, XII Commercial Division of the National Court Register under KRS number 0000217580, REGON number 015803782 and Tax Identification Number (NIP) 527-24-43-955, with the fully paid up share capital in the amount of PLN 5.869.181,75. X-Trade Brokers Dom Maklerski S.A. conducts brokerage activities on the basis of the license granted by Polish Securities and Exchange Commission on 8th November 2005 No. DDM-M-4021-57-1/2005 and is supervised by Polish Supervision Authority.

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