Our Take on the News From Brazil

An update on Brazil

Along with roasters everywhere, ICT is closely following the news out of Brazil.  There has been a flood of developments in past few weeks, and while Brazil’s influence on world coffee prices is profound, it can be extremely difficult to make sense of so many (often contradictory) pieces of information.

• President Dilma Rousseff has been formally impeached and removed from office, and replaced by Vice-president Michael Temer.  The impeachment of Rousseff has strengthened the Brazilian Real against the Dollar, bolstering coffee prices.  However, If the more business-friendly Temer is impeached as well (he is currently the subject of multiple official investigations) that could have a significant impact on the Real and thus on prices.
• Leaf Rust: Roya has impacted Arabica regions in Minas Gerais, along with an unusually cold and long winter.
• A wave of rain in Mid-August has caused very early flowering of coffee trees in southeast Brazil.  These buds would likely be ready in March, two months earlier than normal harvest period.
• La Nina: Brazil is seen entering a La Nina period, which is likely to result in drier than normal weather.  If the newly flowered trees are subjected to a prolonged dry spell over the next few months, they may not develop.
• Brazil’s crop agency Conab forecasts that the country’s Robusta harvest this year will be 9.4 million metric tons, a 16% decrease and the smallest output since 2006.  If accurate, this would mean roasters will need to use lower-grade Arabica as a substitute – which will in turn put upward pressure on Arabica prices by depleting stocks.

The impact of all this on mid and long-term coffee pricing is obviously uncertain, but the potential for supply issues is certainly real.  Global Coffee Monitor raised its forecast for coffee prices, predicting that Arabica will average $1.41 in 2017 and Robusta will average $1,731 per metric ton.  Rabobank forecasts $1.38 for Arabica and $1,740 for Robusta.

As always, ICT will continue to monitor events in Brazil and elsewhere.  While any prediction about the coffee market is only that, a prediction, we believe that an unusually high degree of uncertainty exists, and the potential for higher prices is significant.

Sincerely,

Intercontinental Coffee Trading
San Diego, CA