Coffee Prices Slip as Dollar Strength Sparks Long Liquidation

Dec arabica coffee (KCZ23) this morning is down -2.20 (-1.42%), and Nov ICE robusta coffee (RMX23) is down -5 (-0.20%).

Coffee prices this morning are moving lower as a +0.5% rally in the dollar index sparks long liquidation in coffee futures.  Losses are limited due to falling coffee inventories.  ICE-monitored arabica coffee inventories Thursday dropped to a 9-1/2 month low of 484,738 bags.  Also, on Thursday, ICE-monitored robusta coffee inventories fell to a record low of 3,374 lots (data history back to 2016).

In a bullish factor for robusta coffee, Vietnam’s General Department of Customs reported Tuesday that Vietnam coffee exports in the first eight months of this year (Jan-Aug) fell -4.9% y/y to 1.207 MMT.  Also, Vietnam’s coffee harvest this year is expected to drop more than -7% to 1.67 MMT, the smallest crop in four years, according to a Bloomberg survey of exporters and traders released on May 3.  Vietnam is the world’s largest producer of robusta coffee beans.

Coffee prices have underlying support from weather concerns in Brazil and Colombia.  Climatempo Wednesday said high temperatures and infrequent rain are expected in the coming weeks for Brazil, and diminished rainfall is expected for Colombia.  Brazil and Colombia are the world’s largest arabica coffee producers.

Wetter-than-normal weather in Brazil could delay the country’s coffee harvest completion and support prices.  Somar Meteorologia reported Monday that Brazil’s Minas Gerais region received 7.4 mm of rain in the past week, or 190% of the historical average.  Minas Gerais accounts for about 30% of Brazil’s arabica crop.

An excessive short position by funds in arabica coffee could fuel any short covering rally in arabica futures.  Last Friday’s weekly Commitment of Traders (COT) data showed funds boosted their net-short positions in arabica coffee by 7,704 in the week ended August 22 to 34,986, the biggest short position in 7 months.

In a bullish factor, the International Coffee Organization (ICO) on August 3 reported global coffee exports from Oct-Jun were down -6.2% y/y at 93.44 mln bags.  Also, the Colombian Coffee Growers Federation reported on August 9 that Colombian July coffee exports fell -17% y/y to 846,000 bags.  Colombia is the world’s second-largest producer of arabica coffee beans.  However, Honduras, the largest coffee-producing country in Central America, reported on July 31 that its coffee exports rose +63% y/y in July to 828,499 bags.

The U.S. Climate Prediction Center on June 8 declared an El Nino weather event, which is likely to be supportive of coffee prices.  The U.S. Climate Prediction Center said sea surface temperatures across the equatorial Pacific Ocean had risen 0.5 degrees Celsius above normal, and wind patterns have changed to the point where El Nino criteria have been met.  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.

The USDA Foreign Agricultural Service forecasted in its June biannual report, released on June 22, that world coffee production in 2023/24 will increase +2.5% y/y to 174.3 million bags, with a +6.9% increase in arabica production to 96.3 million bags, and a -2.4% decline in robusta production to 78.0 million bags.  USDA FAS forecasts that 2023/24 Brazilian coffee production will rise by +14.5% to 67.9 million bags, while Vietnam’s 2023/24 production will fall -3.5% to 30.2 million bags.  USDA FAS forecasts that 2023/24 ending stocks will edge higher by +0.8% to 31.8 million bags from 31.6 bags in 2022-23.

Illustrating a tight coffee supply picture in 2022/23, the ICO said the global 2022/23 coffee market deficit widened to -7.3 mln bags from a -7.1 mln bag deficit in 2021/22.  ICO reported that 2022/23 global coffee production increased +1.7% y/y to 171.27 mln bags, but that 2022/23 global coffee consumption increased +1.7% y/y to a larger 178.53 mln bags.

Source: Rich Asplund - Barchart

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