Following frosts in late-July, market is now concerned on droughts impacts in Brazil’s main coffee producing areas, that can impact flowering from September onward.
Unfavorable weather conditions contribute to the rise in the grain bags. Join Camila Dias, Argus Brazil Bureau Chief, and Renata Cardarelli, reporter for the Argus Brazil Grains and Fertilizer publication. They talk about a recent rally in Brazilian coffee prices and its impact on barter rates.
CD: Hello and welcome to Market Talks — a series of podcasts presented by Argus addressing the events impacting commodities and the energy sector in Brazil and around the world. My name is Camila Dias, Argus Brazil Bureau Chief. In today's episode, I talk to Renata Cardarelli, reporter for the Argus Brazil Grains and Fertilizer publication, about a recent rally in Brazilian coffee prices caused by frosts in main production regions and its impact on barter rates. Welcome, Renata.
RC: Thank you, Camila. It is a pleasure to be here.
CD: First and foremost, I would ask you, Renata, to share with us a context on Brazil’s weather situation.
RC: Sure, Camila, that’s important for everyone to understand the larger situation. Frosts hit coffee producing areas three times in late July, which was followed by drought. And this weather pattern follows the 2020 season that was also defined by drought, which impacted crop development. So now farmers are hoping this dry weather goes away as rains are important for flowering from September onward.
CD: So, what you’re saying is that the impacts of frosts are unclear so far, is that correct?
RC: Exactly, Camila. Coffee is harvested in the middle of the year, during the Brazilian winter. About 80pc of the current crop has been harvested and frosts might have a more significant impact on the next crop or even on the 2023 crop. Brazil's national supply company Conab estimates frosts inflicted some degree of damage of up to 200,000 hectares of Arabica coffee, representing about 10pc of Arabica coffee acreage area.
CD: Coffee crops experience a biennial pattern, Renata. Could you explain what this pattern is?
RC: This means one weaker season is followed by a stronger one. So, seasonally this crop would naturally be smaller than the previous one. Brazil's 2020-21 coffee crop is a negative biennial and it is expected to reach 48.8mn bags, according to Conab, down by about 23pc from the 2019-20 crop, which was a positive biennial season.
That is why the real impact on the coffee crops will only become apparent with time, analysts say, as the frosts could either superficially affect the flowering of a tree or even generate the total loss of a crop, especially of the youngest plants. Coffee trees usually take around three years to cultivate. But we can definitely say frosts will dent next year's outlook for coffee supply. Some market participants say losses can vary from 2 to 10 million bags of Arabica coffee.
CD: What were the effects of frosts for Brazilian coffee prices?
RC: The price of a bag of coffee in the cities of Uberaba and Uberlandia in Minas Gerais state surpassed R1,000 in the last week of July, the highest since December 2014 as a consequence of the prospect of damage caused by frosts. The result in the field was less dramatic than expected and coffee prices declined again in Minas Gerais to R923.29 in mid-August, but the level is still 12pc higher than before the frost alerts. But once again prices reached R1,000 by late-August, fueled by concerns on drought impacts.
CD: Price increases have a direct impact on barter rates. How were those impacted by higher coffee prices, Renata?
RC: Barter rates after the frosts fell to the lowest level since June. Higher bag prices spurred the decline in the barter rate in the cities of Uberaba and Uberlandia last week to 3.47 bags/t from 4.17 bags/t in late July. The move may only be temporary, making it a propitious moment to buy fertilizer for the next crop. Still, year to date, barter rates for coffee increased by 0.48 bag/t as NPK baskets almost doubled in price, surpassing the increase in the coffee prices.
Prices of the 20-05-20 and 25-00-25 NPK baskets climbed following higher granular urea, ammonium sulphate and potash prices throughout the year. New input purchases are now targeting the 2022-23 coffee crop, but the upcoming days might be a watershed for Brazilian farmers, as the impact of the frost will become clearer and will dictate whether growers will increase or reduce investment for the next crop.
CD: On the international market, prices also rose, right?
RC: Yeah, Camila, you’re right. A possible pressure on supply and an expected increase in global demand for coffee as the global economy recovers from the toughest restrictions associated with the Covid-19 pandemic led prices in ICE futures on the US exchange to rise by 32pc in July, the month of the frosts. The Arabica coffee contract for December was at $1.99/lb on 29 July and at $1.87/lb in mid-September.
CD: What is the international context?
RC: Brazil is the world's top coffee producer, accounting for about 37pc of global production. Vietnam, which accounts for around 17pc of global coffee production, is the second largest producer but is expecting a 5 to 10 percent decrease in its crop size compared to last year. Vietnam is also grappling with a surge in Delta-variant coronavirus cases, and strict restrictions remain in place throughout the country.
Another point of attention is the global coffee logistics chain. It has been affected by political disturbances in Colombia earlier this year. Exports grew by 9 percent in July from last year and seem to be back on track. Colombia is another important producer, holding a market share of about 8.5 percent of global production.
CD: Thanks a lot, Renata.
This and other episodes of our podcast are available on the Argus website at www.argusmedia.com. Visit the page to follow the events that affect global commodity markets and understand their developments in Brazil and Latin America. We'll be back soon with another edition of Market Talks. See you soon!