Coffee economics

The great Brazil drought drop

It was set up to be Brazil’s best year yet. At this time a year ago, industry bodies were pegging the 2014-15 harvest at 55 – 60 million 60-kilogram bags. The bumper crop was set to pull production figures  Brazil Coffee Droughtout of a deficit, and into the first surplus the market had seen in five years.

This was until the bad weather reports started coming through.

One by one, analysts from private producer groups, exporters, traders and funds have been lowering their predictions.

Consensus has seen around 15 million bags of coffee disappear since the beginning of the year. The latest forecasts don’t expect more than 40 – 45 million 60-kilogram bags of coffee out of Brazil.

As the physical harvesting peaked across the Brazilian coffee regions at the end of June, mill deliveries brought in a high volume of beans. This wasn’t the good news people were waiting for, as disappointing samples are starting to emerge. While the percentage of defects is always higher in mill deliveries registered during the first month of harvesting, industry officials are saying that the percentage this year is two to three times higher than year-ago comparisons.

“The rains in Brazil were not only too late but could be more damaging than good. There is very little coffee inside. The outside appearances are deceiving,” international commodity analyst Judith Ganes-Chase tells GCR Magazine.

Ganes-Chase’s comments summerise basic market sentiment.

“We are getting a steady stream of reports that beans are of a small size, are malformed, or are not there at all. Farmers are harvesting cherries without any beans in them,” reported Sterling Smith, a commodity analyst with financial services company Citigroup Inc.

Word on the ground is that the smallest bean size has been cut by an average 35 per cent, with farmers now needing 600 to 700 litres worth of green beans to fill one 60-kilogram bag. This is compared to the normal ratio of between 400 – 500 litres.

“If you have one empty cherry, two to three malformed beans, and five to six normal, that is going to lead down the road to crop reductions,” Smith said in a market report published in early June.

An example of the current situation can be found at the mighty Cooxupe cooperative, the world’s largest coffee cooperative. The over 11,000 producer members account for between 12 – 15 per cent of the total annual harvest in Brazil. Mill deliveries to date confirm that a “significant share of the beans are very small in size”, according to the cooperative, while another large percentage of the beans have turned black or failed to develop. These reports confirm fears that the drought cut the maturation (or formation) period of the bean short.

“You look at the fruit on the outside and it does not look too bad. But inside the bean is dry, and there is little fruit left, so the yield is going to be significantly lower than initially forecast,” Cooxupe President Carlos Paulino da Costa tells GCR Magazine. In a comment to Brazilian coffee bloggers Cafepoint, de Costa put losses at, best case scenario, 30 per cent. In some parts of Southern Minas, one of the regions most severely affected by the drought, de Costa puts the damage as high as 50 per cent.

Brazil Coffee DroughtThese figures are backed by the local Agriculture Ministry of the state of Minas Gerais. In a report released in late May, the ministry said that up to 45 per cent of the state’s coffee harvest has been damaged.

Southern Minas and Zona de Mata account for around 75 per cent of all production in the Minas Gerais state. As a whole, the area accounts for between 50 – 60 per cent of Brazilian coffee production.

In the initial forecast released last January by Conab, Brazil’s crop supply agency, Minas Gerais was projected to yield between25.6 – 27.1 million bags. That figure was cut to 23 million by Conab’s revised forecast in mid- May. Conab cut its overall production number for Brazil to 45.6 million bags from its previous prediction of 46.5 – 50.1 million bags.

Brazil’s National Coffee Council, meanwhile, has lowered its forecast to between 40.1 – 43.3 million bags, from 44 million. The Brazilian coffee research foundation Procafe says it expects production in the 2014-15 harvest to drop to 40.1 – 43.3 million bags due to drought damage.

Among the few optimistic forecasts is Swiss- based Ecom Coffee Group. As the world’s second largest coffee trader, it insists the Brazilian crop can still reach 51 million bags. This is a significant drop from an initially ambitious forecast of 60 million bags. The United States Department of Agriculture (USDA) similarly had issued its first forecast for Brazil at 49.5 million bags, but recognises that uncertainty prevails.

“At this moment, it is unclear to predict to what extent the aforementioned problems will affect the final size of the crop,” said the USDA in a statement.

Volcafe, the Swiss trading arm of United Kingdom trading house ED&F Man, meanwhile issued its second revised forecast for the 2014-15 harvest in late April, cutting the crop potential to 45.5 million bags.

“Heat and drought in some parts of the coffee-producing areas in the first months of 2014 have negatively affected the bean formation stage of crop development. We have revised down our 2014-15 Arabica estimate from 34.6 million bags to 28.4 million bags, a drop in production potential of 18 per cent. We have revised up our conillon estimate from 16.1 to 17.1 million bags due to improved expectations of yield,” Volcafe said in a report.

Volcafe noted that as a consequence of the lower forecasts, the world can “expect an 11 million bag deficit in the coffee market in 2014-15”, adding that the negative impact of the drought will definitely extend into the next harvest.

“The recent unprecedented weather has affected both the 2014-15 and the 2015-16 crops. Even under the most optimistic scenario for the 2015-16 Brazil crop, we expect a second consecutive coffee market deficit in that season,” said the company.

These predictions are supported by a report released in May 2014 by INTL FCStone. Based on on-the-ground observations made in February and end of May/beginning April, the United States- based financial services providers are predicting losses of 8 – 10 million bags of coffee, which will put the world coffee balance into a deficit of 2 – 3 million bags. However, it said it believed those losses were currently priced into the market.

Other analysts agree, saying that there is sufficient market support to see coffee prices stay in a range of US$1.60 – $1.80 per pound for now, with the occasional spikes in the market of over $2 per pound. But this price range is volatile, and can change in either direction, depending on the news of the day from Brazil.

Ganes-Chase says that coffee prices could surge as high as US$3.25 per pound this year, before meeting resistance.

“There is no way for coffee trees to make up for growth that they have lost to the drought in Brazil’s coffee belt earlier this year. The impact on prices will be to send them above 300 cents a pound,” she says. “I think the market is downplaying losses to the Brazil crop and damage will prove to be worse than current views.”

Brazilian coffee trader John Wolthers off Santos-based exporters and brokers Comexim, says that by September “we will have a good idea” of the true extent of damages. That might be too late for roasters to start making contingency plans.

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