Coffee futures proved among the worst ag performers of 2015 – in particular New York-traded arabica ones which dropped by 24%, compared with the 21% decline in their London-listed robusta peer.
The drop to a large part reflected the decline in currencies in major producers Brazil and Colombia, cutting the value in dollar terms of a commodity in which they represent a large chunk of world supplies.
However, better weather in Brazil’s main arabica-growing state, after a dryness-plagued 2014, and the continued recovery in Colombian output after a replanting programme early in the decade also played a role.
As did continued strong coffee exports from Brazil, which questioned lowball ideas for the country’s inventories.
But will Brazil’s stocks, and export supplies, finally run low in 2016, putting a prop under prices? Or will continued emerging market currency pressure keep futures under pressure?
Expert commentators give their opinions.
“In the coming months, new data about the Brazilian harvest will largely determine the direction of prices.
“Global demand for coffee beans has soared more than 40% in the past 15 years, while production only grew by 25% in the same period, according to International Coffee Organization statistics.
“The resulting decline in stock levels means that annual output fluctuations are having a major impact on prices.
“Besides the output expectations for Brazilian coffee, attention is also focusing on production in Vietnam, Indonesia and Colombia. Robusta is the main
“Output in Colombia, the second-largest producer of arabica beans, has actually been growing for a number of years, reaping the rewards of the regeneration programme.
“All in all, in view of the weather conditions together with tight stock levels, we foresee a slight increase in prices in the coming months.
“The upward potential is limited, however, as any rally is likely to be just further short covering as commodities as a whole remain out of fashion and supressed by dollar strength.”
“Weaker Latin American producer currencies can feed through to coffee prices through multiple channels including: buttressing producer margins upstream; impacting planting rotation; and boosting crop export volumes.
“This is reflected in the fairly strong inverse relationship between year on year changes in the dollar exchange rates to the Brazilian real and the Colombian peso and ICE arabica futures.
“To be sure, we anticipate only modest follow-on weakness to coffee prices from current levels given the already steep sell-off in 2015. Though further dollar strength is expected as we enter Fed lift-off, we are unlikely to see depreciation in the Brazilian real and Colombian peso the same scale and pace seen in 2015.
“With potentially moderating currency headwinds, coffee prices could begin stabilising in 2016.
“The market could be further supported as weak cash prices start eating into the cost curve for marginal producers in Central America and as Brazilian stocks have tightened amid a strong 2014 and 2015 export programme.”
“All in all, coffee supply is by no means plentiful. Another market deficit is anticipated in 2015-16, whereby the range of estimates is large. Approximately 2.5m bags are expected on average.
“The 2014-15 season has probably closed at a deficit, mostly estimated at about 7m bags. The fact that global coffee exports fell by 3% in the 2014-15 season, the first decline in five years, should be attributable to the lower quantities available after strong exports from high stocks the year before.
“We expect the deficits on the coffee market and low arabica stocks to be more strongly reflected in the price trend in the coming quarters.
“Only when it is foreseeable that the optimistic case of a good Brazilian crop is materialising do we expect prices to retreat again.
“That said, the further massive depreciation of the Brazilian real over the year expected by our foreign exchange analysts should weigh heavily on the arabica price.”
“After rallying close to 135 cents a pound in mid-October, on the back of a Conab production [Brazilian] forecast cut to 42.15m bags in 2015-16, prices have declined to a new two-year low across the curve.
“We see three key factors behind this move: Colombia has lowered minimum export quality standards in response to concerns of lower production on the back of El Niсo; after concerns about a lack of moisture in Brazil, rains have returned; and with the first US rate hike now behind us, key producers are likely to see renewed pressure on exchange rates.
“There is still wide divergence on production estimates for 2015-16, and with the possibility of more visible El Niсo conditions over the coming winter 2016-17 yields remain uncertain.
“Accordingly, we believe that prices are likely to remain volatile for some time to come. Yet under prevailing weather conditions we continue to see the cost deflation trend [spurred by emerging market currency weakness] outweighing yield concerns.”
“Coffee futures in 2016 will remain under pressure from currency weakness in producer countries.
“Economies dependent on commodity exports, including among others Colombia, Brazil, Central America, Burundi and Indonesia, will see problems arising one way or another which will reinforce the currency weakness through 2016.
“However, we still believe fundamental bullishness – cemented in a steep deficit of 6.1m bags in 2014-15 and a further deficit of 2.7m bags in 2015-16 – will surface once Brazilian exports run out of steam, which considering low carry-in into this season could take place in early 2016.
“Furthermore, the bullish sentiment will be reinforced if crop tours around Brazil’s coffee regions in January and February show that 60m bags will not be reached in 2016-17, which we believe is the most likely scenario.”
“We expect demand to continue improving and help to remove coffee from global inventories in the near-to-medium term, in turn helping to support prices, assuming that no further significant economic shocks hit global markets.
“Local Brazilian coffee prices are now approaching the cost of production. The economic incentive to follow proper practices and expand production in many areas is falling.
“The El Niсo conditions that are currently present could still lead to decreased production and higher prices in the coming months, and this rally could continue into 2017.”
(Source – http://www.agrimoney.com/feature/arabica-coffee-futures—will-their-rout-end-in-2016–420.html)