COFFEE
• Arabica prices face a strong tension between nascent frost risk and Brazil’s very large prospective crop.
• Frost risks are only shade higher than normal but that will be cold comfort should a frost emerge.
• Absent a frost, supply pressure might see prices (KCU0) fall 15-20%
Frost worries are holding up Arabica coffee prices (basis KCU0), which is not unusual given the upside risk from frosts, and there is no point in producers (or anyone else) selling too early unless they must do so. The window for frost risks will eventually pass and then supply will begin to weigh on prices. The juxtaposition of currently low Arabica inventories and large (possibly a record) Brazilian crop means the tension between the two outcomes is greater than the usual. Here we quantify the likely size and timing of that seasonal pressure. Frosts can cause substantial losses in Brazil’s coffee crops. The more severe the frost, the greater the losses in the subsequent crop and the greater the bid for the current crop. The historical price impact (for the full trading life of the KCU contract) is shown in the table below. Some of this risk has been mitigated by a northward drift of coffee plantations over time. Regions further south, in Parana and (to a lesser extent) Sao Paulo, are more prone to frosts. Those two states accounted for more than 20% of coffee production at the time of the last severe frost in 1994. Now they account for less than 10% so the impact is diminished.
Discussion often highlights the many years since there has been a significant frost in Brazil’s coffee regions. The last frost, a moderate one, was in 1999. The last major frost was in 1994 and that was accompanied by a subsequent drought. The suggestion is that a major frost is somehow overdue, but we are sceptical that there’s a connection between the simple lapse of time and the chances of a frost. A frost is generated by unusual
weather conditions during the southern hemisphere winter not by some cumulative process that has simply failed to erupt for a long period. The weather patterns coming into this year suggest that frost risk is possibly a little elevated but no more. While the risk of a frost is probably only a little higher than usual, it is not the same as the market’s fading memory discounting the chances by too much. The other, more likely, outcome is no frost. Without a frost (or another abnormal weather event) the market will then be moving into a period of seasonally heavy supply. The Brazilian harvest, of a crop in the high year of Brazil’s biennial cycle, will add plenty of new supply to the market, thus, prices are likely to fall in that case. The fall in prices is generally sizeable in years when there were no major crop issues (from drought, as well as frost). The drop is around 10% or about 13¢ based on current prices. While Brazil is the predominant producer, and weather conditions there obviously have a substantial impact on prices, they are not the only influence. Of the 37years in the sample (1973-2009), seven are excluded because there were frost and/or drought events in Brazil. Of the other
30 years, 10 saw prices rise and 20 saw prices fall. In those 20 years, the average price fall was 21%. In summary, a 10% fall in prices is a minimum we can expect from seasonal pressures and, absent other events, the fall can easily be twice as large. Right now, prices are close to the expected path for nonfrost/drought years.
The timing of the fall is worth noting. The largest part of the fall is in the first half of July. After that the remainder of the fall occurs more slowly. Frost risk generally diminishes as July progresses. Moreover, because weather prognoses become more reliable on a 10-14 day horizon, the remaining risk of frost is more easily assessed from the middle of the month.There have been frosts into August, but these have been infrequent (a few times in the past century or so). The biological cycle in Brazil’s Arabica trees creates a high-low crop pattern, which means the seasonal pressure will also vary accordingly.
For the period since 1994, two features stand out, 1) the fall in prices occurs sooner in high-crop years, and 2) the fall in prices is larger in high crop years. Indeed, the price fall in low crop years is marginal. Both features are what is to be expected given the heavier supply weight in the high-crop years. More subtly, the low crop years seem to reach a low earlier, whereas the high crop years tend to make new lows after the initial fall in July. Currently, prices seem to be holding up above the average, perhaps to reflect the current level of modest Arabica inventories. The difference though is small.
To summarise, we still have away to go before we are clear of the Brazilian frost window, so the risk of a large price spike remains. We suspect Arabica inventories are quite low so a major frost would boost prices by a very large amount. Looking at other high crop years, the fall in prices (KCU0) has been modest to date. That suggests frost risk is retained in the collective memory and there remains a (small) degree of reluctance to sell. The frost risk will diminish as we move into July and then the downward pressure on prices will build. Appetite to replenish inventory will ensure a bid in the market, but the size of the crop means that a 15-20% fall in prices is likely.
Discussion often highlights the many years since there has been a significant frost in Brazil’s coffee regions. The last frost, a moderate one, was in 1999. The last major frost was in 1994 and that was accompanied by a subsequent drought. The suggestion is that a major frost is somehow overdue, but we are sceptical that there’s a connection between the simple lapse of time and the chances of a frost. A frost is generated by unusualweather conditions during the southern hemisphere winter not by some cumulative process that has simply failed to erupt for a long period. The weather patterns coming into this year suggest that frost risk is possibly a little elevated but no more. While the risk of a frost is probably only a little higher than usual, it is not the same as the market’s fading memory discounting the chances by too much. The other, more likely, outcome is no frost. Without a frost (or another abnormal weather event) the market will then be moving into a period of seasonally heavy supply. The Brazilian harvest, of a crop in the high year of Brazil’s biennial cycle, will add plenty of new supply to the market, thus, prices are likely to fall in that case. The fall in prices is generally sizeable in years when there were no major crop issues (from drought, as well as frost). The drop is around 10% or about 13¢ based on current prices. While Brazil is the predominant producer, and weather conditions there obviously have a substantial impact on prices, they are not the only influence. Of the 37years in the sample (1973-2009), seven are excluded because there were frost and/or drought events in Brazil. Of the other
30 years, 10 saw prices rise and 20 saw prices fall. In those 20 years, the average price fall was 21%. In summary, a 10% fall in prices is a minimum we can expect from seasonal pressures and, absent other events, the fall can easily be twice as large. Right now, prices are close to the expected path for nonfrost/drought years.
The timing of the fall is worth noting. The largest part of the fall is in the first half of July. After that the remainder of the fall occurs more slowly. Frost risk generally diminishes as July progresses. Moreover, because weather prognoses become more reliable on a 10-14 day horizon, the remaining risk of frost is more easily assessed from the middle of the month.There have been frosts into August, but these have been infrequent (a few times in the past century or so). The biological cycle in Brazil’s Arabica trees creates a high-low crop pattern, which means the seasonal pressure will also vary accordingly.
For the period since 1994, two features stand out, 1) the fall in prices occurs sooner in high-crop years, and 2) the fall in prices is larger in high crop years. Indeed, the price fall in low crop years is marginal. Both features are what is to be expected given the heavier supply weight in the high-crop years. More subtly, the low crop years seem to reach a low earlier, whereas the high crop years tend to make new lows after the initial fall in July. Currently, prices seem to be holding up above the average, perhaps to reflect the current level of modest Arabica inventories. The difference though is small.
To summarise, we still have away to go before we are clear of the Brazilian frost window, so the risk of a large price spike remains. We suspect Arabica inventories are quite low so a major frost would boost prices by a very large amount. Looking at other high crop years, the fall in prices (KCU0) has been modest to date. That suggests frost risk is retained in the collective memory and there remains a (small) degree of reluctance to sell. The frost risk will diminish as we move into July and then the downward pressure on prices will build. Appetite to replenish inventory will ensure a bid in the market, but the size of the crop means that a 15-20% fall in prices is likely.
Nenhum comentário:
Postar um comentário