Keeping an eye on world coffee stocks
From the March 2015 issue.
Global coffee markets are bracing for one of the most volatile periods for prices in years. Brazil has no inventories left and climate change and crop pests could contribute to low global output. Meanwhile, global consumption continues to grow.
When it comes to the global coffee market, it’s really all about Brazil.
Even as the world of coffee has seen prices influenced by anything from oil prices to the economic growth in China, in the end it all boils down to the output of the world’s largest coffee producer.
If Brazil has coffee, the world of coffee is safe, and it doesn’t even matter whether that coffee is from new production or existing supply. But as 2015 gets underway, it’s becoming increasingly obvious that dwindling Brazil stocks could become a major issue for the industry.
Adding to the woes of the market, Brazil’s 2015-16 crop does not look good. Even if projections for the 2015-16 harvest turn out to be a tad better than the most pessimistic projections – and the market won’t know for sure until mid-May when the first lots of the crop in Brazil start reaching mills for processing – at the most optimistic count Brazil is going to run short of at least 4 or 5 million 60-kilogram bags.
“The market is not bullish enough because Brazil has zero stocks left. People tend to forget that Brazil must have working stocks and they are in deficit when stocks go below 8.4 million bags, and in previous years when stocks went below 8.4 million bags this has put the market at US$3.09 per pound,” says veteran Commodity Analyst Judith Ganes-Chase, who runs J. Ganes Consulting in the United States.
This scenario could occur as early as the end of March, when Brazil’s government officially closes the coffee harvest year. The stock end-balance is based on what is left in inventories from the last 2014-15 harvest, calculated against the demand of the local market until the new crop starts to arrive by the end of June.
Ganes-Chase is not the only analyst who has started to raise the alarm. From London to Singapore, traders and roasters are increasingly concerned about what the actual impact on the market and prices will be once the reality of what might be the lowest stocks in history starts to sink in.
US green coffee stocks rose by 126,424 60-kg bags during June 2016 to reach 6,210,612 bags at the end of the month, the Green Coffee Association (GCA) said.
This was the highest level since August 2003.
The end-June level compares with 5,510,114 bags one ye
The European Coffee Federation reports that coffee stocks in Antwerp, Bremen, Hamburg, Genova, Le Havre and Trieste rose 19,086 tonnes (2.8%) in April to 706,789 tonnes or 11.780 million bags, up from 11.622 million bags by end of April 2015. (chart)
World Stocks At Historic Low As Brazil Crop Woes Continue
As world coffee stocks fail to rise despite multiple reports of bigger crops between 2011 and 2014, global coffee prices are bracing for what could become one of the most volatile periods for the market in years. At the bottom of the equation, prices are more susceptible to stocks than ever before, and to those in the bear camp of the market who for years have tried to convince the market there is plenty of coffee to go around, the figures just don’t add up. Come March 31st when the world’s largest grower Brazil officially makes status for the year-end balance, even by the most optimistic market views Brazil is running a growing deficit. Making an already bad situation worse, Brazil has no inventories left to cover the deficit expected from the new 2015-16 harvest, and there is no help from the rest of the world where climate change and crop pests are expected to produce the lowest output in as much as 10 years. This, all along as global consumption continues to defy production trends and has expanded by close to 20 million bags in the last five years. How, exactly, is the coffee industry expected to cope?
BY MAJA WALLENGREN
When it comes to the global coffee market, it’s really all about Brazil. Even as the world of coffee has seen prices influenced by anything from oil prices to the economic growth in China, in the end it all boils down to Brazil. If Brazil has coffee, the world of coffee is safe, and it doesn’t even matter whether that coffee is from new production or existing supply. But as 2015 gets underway, it’s becoming increasingly obvious to anyone from industry analysts to market participants that the dominating problem is that the stocks are gone. Adding to the woes of the market and pricing for roasters ahead, the Brazil crop just does not look good. Even if projections for the 2015-16 harvest from the world’s largest producer and exporter turn out to be a tad better than the most pessimistic projections – and the market won’t know for sure until mid-May when the first lots of the crop in Brazil start reaching mills for processing – at the most optimistic count Brazil is going to run short of at least 4 or 5 million 60-kilogram bags.
“The market is not bullish enough because Brazil has zero stocks left. People tempt to forget that Brazil must have working stocks and they are in deficit when stocks go below 8.4 million bags, and in previous years when stocks go below 8.4 million bags this has put the market at $3.09 per pound,” said veteran commodity analyst Judith Ganes-Chase, who runs the Ganes-Chase Consulting company.
This scenario could according to some analysts happen as early as the end of March when Brazil’s government officially closes the coffee harvest year for the stock end-balance based on what is left in inventories from the last 2014-15 harvest calculated against the demand needed for the local market until the new crop starts to arrive by the end of June.
And Ganes-Chase is not the only analyst who has started to raise the alarm bells in the market. From London to Singapore, from New York to Tokyo, traders and roasters are increasingly concerned about what the actual impact on the market and prices will be once the un-desirable truth of what might be the lowest stocks in history starts to sink in.
“When I go over my calculations, the bottom line is that Brazil has a deficit and the only
question is how big it’s going to be,” said Pedro Echavarria, an independent analyst in Colombia. “Brazil needs at the very minimum 12.5 million bags in working stocks for each quarter in order to sustain the balance in its domestic market and unless there is a major surprise and some unreported inventories appear – which I consider highly unlikely – by March 31 the balance in Brazil will be at a little over 8 million bags at the most,” Echavarria told CGR Magazine.
Many industry observers ask why the market has not yet reacted but instead actually pushed prices down to a range between $1.60 and $1.80 per pound since early January 2015. According to the bear camp in the market, Brazil had back-to-back bumper crops in both the 2011-12 and 2012-13 crop cycles which produced crops of between 56 and 58 million bags in each cycle. So where has all this coffee gone and why is it not showing in overall stock figures which are actually down? The simple answer to this is that there has been no evidence to date supporting that such high crop volumes were actually ever produced in Brazil.
At the root of what makes any debate or real analysis about stocks so much more complicated is that very little reliable data exist. Figures for stocks in producing countries have always been a source of great manipulation by market players across the industry from origin to importer.
“The current supply/demand balance is rather tight,” said the European Coffee Federation in a 2014 market report, adding that available stocks in origin are “being particularly difficult to estimate.”
It’s obvious that some stocks at any given time can be found where coffee is produced, but it’s near impossible ever to know with any certainty that of the coffee actually held in warehouses what has not already been sold and is merely awaiting shipment. Coffee held in warehouses in importing countries are for the most part always coffee that has already been purchased and on its way to the buyer’s final destination, but this coffee does not constitute stocks.
Taking a look at the only statistically proven data available, stocks in the two key importing markets of the European Union and the U.S. are actually flat or lower today than what was the case five years ago. Even though certified stocks at the ICE futures exchange in New York has gradually increased over the last 2 years – a fact attributed to the two big crops in Brazil which led to an increase in coffee shipments to the exchange from other producing countries – overall green coffee stocks in the U.S. stood at just over 5.52 million bags by Dec. 31, 2014, according to the U.S. Green Coffee Association. This compares to 4.6 million bags at the end of 2009, but is flat on stocks of 5.49 million bags by the end of 2003. The same story goes for European stocks, where even though stocks have increased in the last few months to 11.49 million bags by the end of 2014, stocks are actually 15 percent lower at the moment than five years ago where total European stocks stood at 13.52 million bags, data from the European Coffee Federation show.
And total stocks according to proven warehouse records in Europe and the U.S. were at the end of 2014 at 17.016 million bags, a drop of 5.9 percent from stocks of 18.088 million bags registered by the end of 2009. But in the same time stocks have fallen, global consumption has actually expanded by almost 20 million bags since 2009. Based on recent years annual growth rate of 2.1 percent world consumption is set to approach 152 million bags by the end of the 2015 calendar year, up a stunning 19.5 million bags since 132.3 million bags in 2009, according to the International Coffee Organization.
“A year ago Brazil had, at the most optimistic calculations, surplus stocks of between 6 and 8 million bags of coffee, but Brazil has exported that same surplus during the 2014-15 crop cycle to make up for the lower production and keep its share in the export market,” said Echavarria, who has five decades worth of detailed records of world production and stock data. “By March 31, when Brazilian authorities evaluates the end-of-harvest balance it will reveal a major deficit. Add to that the effect of the drought on the new harvest and the balance ahead will be put the market in an even more vulnerable position,” he said.
SO what happened? Why is this all of a sudden creating such a huge surprise to everybody in the market from roasters to importers alike?
“There has for years been an incredibly aggressive campaign of speculation by the bear camp in the market, which held record short positions up until February 2014 and therefore were desperate to cover their positions at the lowest possible price. So even when all the crop damage was well known not just in Brazil, but also in producers like Vietnam, India, Indonesia and in Central America, they did everything to talk the market down,” said one trader with a major multinational exporter, who asked not to be named.
Other analysts say the “cover up” by the fund-controlled market participants started as early as February 2013, when the market still stayed faithful to all those reports predicting a massive and even potential record crop in Brazil in what was then to be the 2013-14 harvest. But local sources and exporters in Brazil say it was well known that a severe drought during the first quarter of 2013 cut the Brazilian robusta harvest short by at least 30 percent, hence resulting in a much lower crop. This, however, was largely ignored both by the market as well as by the trade press and commodities reporters covering coffee in Brazil.
Flowering in Vietnam, similarly, suffered severe challenges during February 2013 as the key producing areas across central Vietnam remained dry for between 4 to 6 weeks just after the onset of the initial flowering.
“A lot of traders continued to play down the severe dryness in Vietnam at the time, saying this was all normal as it occurred during the dry season,” said local exporter Hung Nguyen in Vietnam’s largest coffee province of Dak Lak in the Central Highlands, adding: “But anyone working with coffee knows that even though it’s the dry season, once the trees have flowered, at some point maximum up to 3 or 4 weeks later you have to have rain in order for the flower to develop into cherries and that just didn’t happen.”
Back to Brazil in early 2015 and the situation continues to get worse as the severity of the worst drought in over 70 years which started one year ago continue to negatively impact the new harvest. If the most optimistic projections hold, Brazil may still produce a 2014 crop of between 45 and 47 million bags. But this will in any case fall below the market demand for Brazil to produce at least 50 to 52 million bags in order to sustain world exports of at least 32 million bags and domestic demand of some 21 million bags.
“Several recent reports have forecast an increase in production in the next year, with sufficient stocks available to cover the shortfall in 2014/15,” said the International Coffee Organization said in its latest market report, but added that the new harvests in both Brazil and Central America continue to be exposed to negative weather effects.
“Exports from Central America are mostly recorded lower in 2014 as the coffee leaf rust outbreak continued to affect production, which is also the case in Mexico and Peru. Overall rainfall levels in Brazil remain below average, with the development of the 2015-16 crop now at a crucial stage.” said the ICO.
Check mate! Roasters would be wise to start buying coffee to ensure they have their books covered before the official stock balance report from Brazil is released after March 31.
“We only need to have a little bit of problems with the forecasts for one of these regions, be it Brazil, Central America or even Colombia not producing as much as many are hoping for, and then the market will be in a position where it lives from one crop to the next. This is not a healthy situation,” said Echavarria. Roasters beware, it’s time to buy coffee!