Brazil – Early January 2016 situation

| January 12, 2016

2016-01-12_post-imageOne could not expect a better weather condition for next crop starting in May-June 2016 in the Brazilian coffee belt.

The plantations have benefited from good internal prices for the last 4 years as well as the proper care after the drought with plentiful pruning and proper management preparing for recuperation.

The flowering last OCT/NOV was excellent, fixation at its max and fruit growth is very good up to now.

If we don’t have a repetition of the localized high average temperatures and high insolation with lack of rains from now thru May, Brazil will harvest its best harvest in volume within decades.

Quality of the crop will be excellent in case we have a dry winter, this is is at risk this season due to the strong El Nino effect/impact but we can only comment on quality by July- August 2016.

There are realistic anticipated “average” expectations of a crop around the 55 million bags.

On the other hand, if Brazil remains the center of fundamental coffee issues, the carryover last June30th – 2015 was the lowest in over 50 years,

Probably between 2.5 and 5 million bags including 1.4 million owned by the government.

Production did not surpass the 46 million totaling max 51 million bags available for the July 1rst/2015 – June 30th – 2016 Total internal and export demand.

Brazil has exported an average of 33.5 million bags these last 3 years and its internal consumption is today of 21 million bags totaling 54.5 million bags demand.

If these numbers repeat by commitment, there will only be a 500 thousand bags surplus “At Best“ before the new crop steps in.

Please have in mind that at least 2 million bags never get sold and shipped or consumed as these are owned by collectors, law suits by banks, government inventories and operational in the flow volume.

The situation seems quite tight and there are only 2 ways to relax it a bit:

1 – anticipate the new harvest by harvesting green fruit in early May “ if the weather permits by climate behavior.

2 – Sell less exports which is a question mark as shipments remain absolutely in pace with last years numbers when Brazil shipped 36 million bags.

Even with the actual economic crisis in Brazil, no decline in the internal consumption is expected, only a stagnation.

So if an internal coffee supply squeeze is so evident in Brazil, why aren’t we seeing NY at higher value?

Brazil has become hostage of its own agronomic efficiency and economic crisis;

On the efficiency side, Brazil is a great commercial partner, always in the market, traditional supplier, always working to increase market share and incentivizing internal consumption, research, agricultural management, quality and productivity.

This scenario promotes a consistent sustainable and independent commercial and economic flow where every month, producers/trade sell/supply over 1.75 million bags for internal consumption + 3.8 million bags for exports and another share of 1.5 million that remain within operational preparations/manipulation in warehouses and beneficios.

These figures indicate clearly that Brazil producers and coffee trade are selling between 5,5 and 6 million bags every month, this damps NY impetus to gain substantial value we believe.

On the economic side, Brazil’s weak real allied to the strong US Dollar, have kept returns to local producers over and around the R$ 500,00 per bag for a fine cup at Farm Gate.

This is the same value today with a Real at R$ 4 to 1 Dollar and NY at average $ 1.20 as was the R$ 500.00 2 years ago with the Real at R$ 1.60 to the Dollar and NY at $ 3.00/lb.

While inflation has increased, producers have not felt that impact in coffee production costs yet, they have increased productivity/quality and lowered costs thru better management in these last 5 to 10 years.

Where we in the coffee trade and industry start to find signals of a squeeze on Brazilian coffees is for the 2014/15 crop which is small in volume and bean-size as differentials have gained 15% on the bold beans and 7 to 10% on the Medium beans.

The increase in differentials still seems quite moderate considering the aggressive behavior of exporters added by the stable internal consumption figures.

With the constant supply of Colombia, Peru, Honduras and Nicaragua at most competitive levels between NY + 14 FOB and + 18 FOB, Brazil differentials now suffer to perform at actual higher levels, this could slow their export figures for the last semester of the 14/15 crop cycle?

As a matter of fact, Colombia remains the best quality and price for the last 12 months, those are another 1 – 1.2 million bags per month in the supply chain.

Nothing seems to stop Colombia from remaining in the current path.

I hope that our input can be of value.

Best regards, Christian Wolthers


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