Market Reports

Rain and drought put Brazil’s crop in doubt

Speculation about the size of Brazil’s annual coffee crop is nothing new. Brazil supplies between 35 and 38 per cent of the entire world supply of coffee in any given average cycle. Even in off-cycle years, which traditionally have produced lower volumes as trees are stressed and recovering from high yields in the on-cycles, the arrival of the Brazil crop traditionally eases pressure on the market. This year has been no different. But from the first round of flowering for Brazil’s 2013-14 harvest, the signs pointed to an unusually healthy crop. Even Conab, Brazil’s official crop supply agency, said in its second forecast for the new harvest released in May that it expects the current Brazilian coffee crop to be the biggest off-cycle yield on record. Figures vary wildly, however, from Conab’s relatively conservative estimate of 48.6 million 60-kilogram bags to Volcafe/ED&F Man, which has pegged Brazil to produce close to 58 million bags. Even for Brazil, this is speculation at “a whole different level”, says one physicals trader in the US green coffee market, speaking to Global Coffee Review on condition of anonymity. More than that, the broad gap in estimates is causing uncertainty in the market as to how much coffee can realistically be expected ahead of the onset of the main roasting season in the US in late September. As always in the coffee cycle, when it comes to weather, timing is crucial. “I was astounded during my trip to see this year’s off-cycle crop. It’s the best off-cycle crop I have seen in 12 years of visiting Brazilian coffee growers,” says Carl Leonard, Vice President for Green Coffee at US roaster, Community Coffee. He attributes the high yields to better crop husbandry and increased use of fertiliser thanks to the high prices in 2010 and 2011. “It’s evident that producers have utilised excellent weather, with ample investments to maximise quality and production. Competent Brazil suppliers continue to advise that 58 million is a real possibility. I observed what was on the trees at the beginning of harvest, it does appear to be a real possibility,” says Leonard. But hopes for what started out as the potential perfect crop in Brazil have since been dashed. First came the heavy unseasonal rains in the second half of June. Even the most optimistic market players in Brazil who initially had been pointing toward a harvest of at least 54 million bags, now say these rains did indeed cause significant damage to quality and some losses. Then came the frost in southern Parana in July. While this is one of Brazil’s smallest growing regions, producing about 2 million bags, this nevertheless added to the losses. “The widespread rains that are mitigating the effects of the cold front in the region could hurt the quality of coffee now being harvested as it interrupts the drying process of the beans and infuses a bitter taste, reducing its value on the market,” German analyst F.O.Licht said in a July market report. “While most coffee regions were spared from frost in the period under review, the state of Parana did see some frost on coffee plantations in the middle of the month. The Centre for Advanced Studies on Applied Economics [Cepea] sees the next 2014-15 [April to March] crop [in Parana] being reduced by up to 20 per cent due to the frost, while the current harvest of roughly 1.7 million 60-kilogram bags is expected to be left unaffected,” the report said. But the most significant damage factor goes back to January and February this year, when excessive dryness hit the top producing regions in Brazil’s largest Robusta coffee belt in the east coast state of Espirito Santo. While traders and exporters at the time played down the impact of the dry-spell, the damage from the drought has been so extensive that Brazil will be unable to produce more than 49.4 million bags, says John Wolthers of Santos-based exporters, Comexim. Wolthers says the company cut its forecast for the new harvest by a whopping 3.8 million bags, all for output from the new Brazilian Robusta crop, also known as conillon, for which harvesting had been fully completed at the time of publication. “Concerning conillon, we originally estimated a crop of 16.8 million bags, which we are forced to reduce to about 13 million bags. This volume reduction was due to lack of rains in January and February of this year, which also caused a reduction of yield. Beans are smaller than in normal years due to lack of humidity at the right time,” Wolthers says. “As for the Arabica crop, the harvest is of not so good quality because of the long and constant spells of rain during June. We maintain the overall expectation for the Arabica harvest to be of 36.4 million bags, but with the lower conillon number, we reduce our overall Brazilian production to 49.4 million bags,” he says. Not all industry stakeholders in Brazil are so optimistic as far as the Arabica crop is concerned. Officials at the Cooxupe Cooperative, the world’s largest coffee cooperative based in the Southern Minas town of Guaxupe, have noted that bean size in the new Arabica crop has been significantly smaller this year, which in turn reduces the harvest volume. “According to the reports we had received by 24 July, the bean size is much smaller this year, and only 22 per cent of all the coffee processed to date reached bean size screen 17, compared to 35 per cent last year,” says an official from the grading department at the Cooxupe Cooperative. The good news is that with less Brazilian Robusta in the market, and additional weather problems reported to have cut down on Robusta supplies from Vietnam and Indonesia, the overall quality of the coffee available to consumers is up. Analysts expect that part of the shift by roasters from Arabica to Robusta, which the market witnessed following the 14-year-high prices in 2010 and 2011, will shift back this year to higher quality blends based on an increased share of Arabica beans. In Brazil, roasters are already reporting the development of this trend. As consumption continues to rise in the local market, with Brazilian demand pegged to rise to about 21 million bags in the 2013‑14 marketing year, some analysts even speculate that this could drive domestic consumption even higher. “Brazilian coffee consumption is rising 3 to 3.5 per cent,” says Chris Narayanan, a financial analyst with Societe Generale. Narayanan adds that this, combined with the current lower prices for consumers, would likely “encourage more consumption” and an even higher increase in consumption in the year ahead. And as the increasing consumption in Brazil is not already adding pressure on the local Brazilian market, exporters will also have to deal with the impact of a price support program which Brazil’s President Dilma Rousseff approved in August. “Growers who need resources in the short term can now get them,” Roussef told coffee growers in Southern Minas. The program comes after months of nationwide protests by coffee farmers demanding government support in the face of the four-year-low prices seen in most of June and July. Even in cost-efficient Brazil, this erosion in prices has pushed prices below the cost of production. Brazil’s government now plans to buy up to 3 million bags of coffee at subsidised prices through an option program to keep pressure on prices. Market reaction to the Brazilian President’s comments was almost immediate, leading to gains of 4.1 per cent in the week following the news. Traders expect prices to remain buoyant in the face of the Brazil price support. But as always, with a new Brazilian crop starting to reach the market, a lot can still happen and uncertainty remains. Analysts say roasters should keep a close watch on export figures from Brazil as the pace of shipments will likely be the best indicator as to how much coffee will be available in the months ahead.

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