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Brazilian flowering focus – one year on

From the November 2015 issue.

While climatic factors dominate discussion about Brazil’s crop, the true determinant of prices could be the depreciation of the Brazilian real against the US Dollar. INTL FCStone explains.

One year on from the widespread focus on the 2014 Brazilian wet season (or lack thereof), once again it is that stage of the crop cycle when flowering for Brazil’s next crop is in the spotlight.

This time, however, attention is on the early and abundant flowering for 2016-17 rather than the lack of flowering there was a year ago.

The concern now is whether the backing rainfall is sufficient to ensure that blossoms do not drop.

There is no doubt that there will be an abundance of Brazilian weather reports and crop development/lack of development updates in coming weeks, but it should also be highlighted that there is an apathy towards purely weather factors, given that bullish crop forecasts one year ago based on weather reports ended up being downgraded six months later.

While weather reports will abound, the key factors for coffee prices at present remain the depreciation of the Brazilian real currency against the US dollar, negative macro sentiment, and early flowering in Brazil again prompting forecasts of the elusive 60-million-bags production level for the world’s top coffee growing country.

At current ICE Arabica prices of around US$1.20 cents per pound, the market is already factoring in bearish influences.

Focus now is on whether crop growing conditions and reports in coming weeks are enough to counter or compound current coffee sentiment. In September/October 2014, one of the key considerations of Brazil’s unusual weather was the Amazon flow.

Seasonal rainfall, which for coffee in Brazil usually starts in mid to late September, comes from a southward wind moving moisture from the Amazon River Basin.

Reports last year were that climate change and ocean temperatures in the Pacific delayed the Amazon flow, and deforestation of the Amazon weakened it. The role of rainforests in the water cycle is to add water to the atmosphere through the process of transpiration (in which plants release water from their leaves during photosynthesis).

This moisture contributes to the formation of rain clouds, which release the water back onto the rainforest. When forests are cut down, less moisture goes into the atmosphere and rainfall declines, sometimes leading to drought.

Last year there was a lack of humidity in the atmosphere to interact with the cold fronts that swept through Brazil, and without that there was no substantial rain because the fronts dissipated before getting to Brazilian coffee growing regions.

This year, reports are that the cold fronts that brought unusually early rain was not due to Amazon flow, but simply due to very strong fronts that pushed through into the coffee areas.

Agronomist sources say that only twice in 35 years has there been the high rainfall volumes that have been seen in 2015, noting that rains were very widespread too. Early reports are that there has been fantastic flowering in all areas, the fields so white that the term “bridal veil” is being used. 

This first flowering boosts the production potential of the 2016-17 crop, but also requires follow-up rainfall to ensure the maximum potential.

Drier weather returned mid-September 2015 after the early abundance of rains, and agronomists say good coverage of wet weather is needed by the end of September to help fixation of the flowers. They also note that worldwide reports of El Niño developments are in the back of traders’ minds, and while some say that the early Brazilian rains are already a sign of El Niño, others say there is unlikely to be any impact until near the end of the 2015 calendar year.

The Climate Prediction Centre reported mid-September that El Niño conditions are present and that there is a 95 per cent chance that El Niño will continue through in the Northern Hemisphere winter 2015-16, gradually weakening though spring 2016.

While those that have traded on the weather in recent years appear less willing nowadays to act on reports, with many market bulls being hit by trading on drought the last two years, weather conditions will continue to be monitored.

However, the major influences of currency and macro-economics remain top of the market-moving list for coffee at present, particularly the relentless depreciation of the Brazilian real against the US dollar.

On 24 September, 2015, the real fell to an all-time low, touching 4.2421 per US dollar.

Pressure is persistent from political tensions and the downgrading of Brazil’s status to “junk” by ratings agency Standard & Poor’s.

There is pessimism about President Rousseff’s proposal to rein in the budget deficit, given her lack of support in congress and amid reports that lawmakers on the floor of the lower house have begun formally discussing the possibility of impeachment.

Note that until this month, the Brazilian real’s previous record lowest level was 4.0020 per US dollar in October 2002.

The real was launched in mid-1994, when it replaced the country’s previous currency as part of a plan to tame rampant inflation.

Aside from the near-term bearish impact of increased selling and exports on the back of weakening local currency against the US dollar, because it means a higher local coffee price, there is the potential long-term bearish impact of increased focus on boosting production.

Much depends on what percentage of producers’ inputs are dollar‑denominated costs, as fertiliser costs are more expensive with devaluation in local currency terms if they are dollar-denominated.

Currency focus, along with climate monitoring, means that volatility is likely to continue in the world coffee market. The bias has been to the downside primarily because of the real’s depreciation, but more recently the flowering for the 2016-17 Brazilian crop.

The question is, will climate considerations take over from currency ones in coming weeks?

 

GCR Disclaimer: Comments in this article should be construed as market commentary and not as market trading advice.

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