Arabica Coffee Gains on the Roll to the May Futures Contract

Rich Asplund - Barchart - Wed Feb 21, 11:24AM CST

May arabica coffee (KCK24) this morning is up +1.00 (+0.54%), and Mar ICE robusta coffee (RMH24) is down -2 (-0.06%).

Coffee prices this morning are mixed. Arabica coffee is higher today as traders exit the March contract and roll over into the May arabica coffee contract, with today being the first notice day for March arabica futures. Also, the Brazilian real (^USDBRL) today rose to a 2-1/2 week high against the dollar, discouraging export selling from Brazil's coffee producers.

Robusta coffee is under pressure on the increase in Vietnam's coffee exports after Vietnam's General Statistics Office today reported that Vietnam's Jan coffee exports rose +14.8% m/m and +67.4% y/y to 238,266 MT. Vietnam is the world's largest producer of robusta coffee beans. Losses in robusta coffee were limited after ICE-monitored robusta coffee inventories fell to a record low.

An easing of dry conditions in Brazil is bearish for coffee prices. On Monday, Somar Meteorologia reported that Brazil's Minas Gerais region received 57 mm of rainfall in the past week, or 101% of the historical average. Minas Gerais accounts for about 30% of Brazil's arabica crop.

Coffee inventories are tight, which is a supportive factor for coffee prices. Today, ICE-monitored robusta coffee inventories fell to a record low of 1,958 lots. ICE-monitored arabica coffee inventories fell to a 24-year low of 224,066 bags on November 30, although they recovered moderately to a 3-month high last Friday of 307,262 bags.

Larger coffee supplies from Brazil are bearish for prices. Last Wednesday, Cecafe reported that Brazil's Jan coffee exports jumped +45% y/y to 3.7 million bags. Brazil is the world's largest producer of arabica coffee beans. Also, The International Coffee Organization (ICO) reported last Wednesday that Dec global coffee exports rose +13.6% y/y to 12.168 million bags, and from Oct-Dec, global coffee exports rose +6.8% y/y to 32.419 million bags.

A negative factor for coffee was the hike by Safras & Mercado on February 5 to its 2022/23 Brazil coffee crop estimate to 61.1 million bags from a previous estimate of 58.9 million bags. Also, Brazil exporter group Comexim on February 1 raised its Brazil 2023/24 coffee export estimate to 44.9 million bags from a previous estimate of 41.5 million bags.

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 from Vietnam 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 the projection from Conab, Brazil's crop forecasting agency, on January 25 that Brazil's 2024 arabica 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.

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.

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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.