Coffee economics

INTL FC Stone explores El Niño’s impact on coffee worldwide

Coffee’s popularity continues to steadily increase, with global consumption totalling 149.3 million bags for calendar year 2014, according to the latest International Coffee Organization (ICO) data. As climate change threatens the sustainability of coffee crops, however, there are fears that coffee supply won’t be able to keep up with growing demand. Unfortunately, coffee is grown in some of the regions most vulnerable to climate change. Central and South America, where most of the world’s Arabica coffee is grown, has shown some of the greatest changes to weather patterns since the start of the century. “Ideal average temperatures range between 15 to 24ºCelsius for Arabica and 24 to 30ºC for Robusta, which can flourish in hotter, drier conditions but does not tolerate temperatures much below 15ºC, as Arabica can for short periods,” says the ICO. The coffee industry has taken steps to reduce the affects of climate change, but long-term impact is seemingly unavoidable. Brazil Weather Concerns The world coffee market has been focused on Brazilian weather for many months now, and the importance of the climate and weather patterns cannot be more clear given that traders have continually been awaiting fresh reports regarding Brazil’s coffee crop – reports that have regularly been pushed back given the delay in the crop cycle due to the delayed rainfall season. First of all, flowering reports in order to give a barometer for 2015-16 production were two months late. Then traders were told to await reports of setting. Now the wait is on for reports on the actual cherry load on the trees. Only then will there be any more certainty about the prospects for 2015-16 Brazilian output. There has been so much uncertainty for so long now that many players are either apathetic or scratching their heads at current prices and the medium-term market outlook, or both. Other than reacting periodically to daily rainfall forecasts, coffee has been predominantly macro and technically driven, but what is certain at a time of uncertainty is that coffee fundamentals are sure to bite again at some stage.  Until then, weather forecasts continue to dominate. There has been, and is, so much unknown in the market that daily activity has been more weather-driven on a day-by-day basis than it has been before – simply because actual daily weather forecasts are the only known factor, and therefore in any way concrete, for day traders to act on. A return of dry weather to Brazilian coffee belts in January, after rains only started in November and December and rainfall was not uniform, saw ICE Arabica futures head higher at the start of 2015. But in mid-January forecasts of a return of rains, even if below average, put pressure on prices. World Weather Inc has been highlighting that rains are erratic since end-January, and outside of isolated areas “resulting precipitation will not be enough to counter evaporation or bring on a net improvement in soil moisture”. Agronomists underline that the wet season is not only unusual because it began two months late, but once rains started it has been unusual because of the distribution, frequency and volume that has been recorded since it began. Somar data continued to show below average rains in coffee areas in January. At time of print, it was forecasting that in the first week of February there would be a return of strong and widespread rain to Espírito Santo, Zona da Mata of Minas Gerais and southern Bahia – something it notes has not happened for at least 50 days, with cumulative averages of 50 – 70 millimetres. Expectations of increased rainfall again in February have been enough to exert pressure on ICE Arabica prices again end-January. The impact of the Brazilian climate on market prices is clear. Only once the prospects for the 2015-16 crop, and therefore the world Arabica market, become more clear, will there be a renewed fundamental impetus for ICE Arabica futures. El Niño and La Niña According to the latest report from the Climate Prediction Center, National Centers for Environmental Prediction and NOAA/National Weather Service, there is an approximately 50 – 60 per cent chance of El Niño conditions during the next two months. If El Niño were to emerge, the forecaster consensus favours a weak event that will end in early Northern Hemisphere spring. La Niña, meaning little girl, is the corollary El Niño, and is best described as its cold and wet counterpart. Although it often follows an El Niño weather year, this is not always the case and is not a prerequisite to its formation. Whereas El Niño is defined by abnormally warm water in the equatorial Pacific, unusually cold ocean temperatures in this region are characteristic of its so-called sister. The cool water is referred to as “cold tongue” and provokes variations in seasonal temperatures. The phenomenon comes into existence when a huge mass of cold water rises to the surface off the West Coast of South America. Cooler air in the East Pacific tends to reinforce the traditional trade winds, and warmer Pacific waters are driven westwards towards Australia. As with El Niño, the impact of La Niña in any one year is unpredictable and therefore the effect on global coffee production can only be surmised. There may be no impact at all. On the demand-side, the impact caused by a colder than normal winter must be considered. Could there be a significant increase in coffee demand if the winter is colder than normal? Much depends on the severity of the system, but during moderate and severe episodes, an average drop in world coffee production of about 1 per cent can be used as a ballpark figure. If dramatic increases in rainfall are seen in Southeast Asia during key development stages, then key growers Vietnam and Indonesia could see crops fall by 2 per cent or more. The biggest example of La Niña hitting coffee output severely is Colombia, where episodes in the last number of years have hit output by around 5 per cent. With Colombian output only getting back up to previous levels of around 12 million bags, due to various other factors, the concern of a severe La Niña event would be that this recovery is thwarted. Most recently in Colombia, a recent lack of rainfall has been present throughout the main coffee producing areas. The dry periods before the arrival of El Niño are favourable conditions for the spread and reproduction of Broca, the coffee berry borer beetle. The period from December to January (and June to July in midyear) are propitious times for farmers to carry out insect control actions such as eliminating all the ripe cherries left on the tree after the end of the harvest before starting the renovation of coffee plantations. Overall, weather is the main factor in determining global supply, affecting crop quality and influencing global coffee prices. The coffee market remains notoriously volatile as weather patterns become more difficult to predict. GCR Disclaimer: Comments in this article should be construed as market commentary and not as market trading advice.

Leave a Reply

© All Rights Reserved. All content published on this site is the property of Prime Creative Media. Unauthorised reproduction is prohibited