A renewed bullish sentiment triggered by a spate of negative reports on the current Brazilian crop took the ICO composite daily price up by nearly 15% in the last two weeks of July. Several external sources have issued lower production estimates in the last month, spurring the market higher. The damage from the drought at the beginning of the year is expected to cause a global supply deficit in crop year 2014/15, with production in Brazil officially estimated to decrease by 9.3% to 44.57 million bags, its lowest level in three years.
The monthly average of the ICO composite indicator for July settled on 152.50 US cents/lb, up 0.4% on June. However, the daily price increased from 145.14 cents on 11 July to 168.55 cents by the end of the month, including an 8.75 cent overnight jump on the 31, reflecting the mounting concern over the size of the Brazilian crop.
In terms of the ICO group indicators, the monthly averages of the three Arabica groups were all slightly lower compared to June, with Colombian Milds, Other Milds and Brazilian Naturals -0.5%, ‑0.5% and -0.3% lower respectively. Robustas on the other hand settled 2.9% higher on 101.79 cents. However, all four indicators recorded their highest daily level on the last day of the month, with the three Arabica groups all jumping by over 12 cents in one day.
The arbitrage between the New York and London futures markets narrowed slightly on average in July, down 2.9% to 83.91 US cents/lb. However, this widened to over 100 cents by the end of the month, as Arabica prices increased faster than Robusta. The price differentials between the three Arabica groups and Robusta also decreased compared to June.
Price volatility was notably higher in July than June, with all group indicators except Robusta recording higher monthly volatility levels, as increased speculation focused on the size of the Brazilian crop. However, price volatility remains well below the levels recorded earlier in the year.
Total exports for June 2014 came to 9.2 million bags, broadly unchanged on June 2013. This brings total exports for the first nine months of coffee year 2013/14 (October to June) to 81.8 million bags, 3.5% lower than the same period in 2012/13.
Total Arabica exports are down -0.3% to 52.3 million bags; Colombian Milds are up significantly by 21.8% to 9.2 million bags, as production continues to recover in Colombia, already exceeding 10 million bags so far this crop year.
Other Milds, on the other hand, are 10.5% lower on 17.5 million bags due to the coffee leaf rust outbreak in Central America. More specifically, exports are down by 20.3% in Costa Rica, 49.1% in El Salvador, 13.9% in Guatemala, 7.6% in Honduras, 28.3% in Mexico and 11.5% in Nicaragua. Exports of Brazilian Naturals are up 0.9% year on year, with a particularly notable increase of 9% in exports from Brazil. Indeed, this is the second-highest volume of exports by Brazil in this time period on record, exceeded only by 2010/11.
Exports of Robustas are down 8.6% compared to 2012/13, although shipments from the largest Robusta producer, Vietnam, are unchanged on an estimated 16.2 million bags. Indonesia, however, has dropped dramatically from 8.3 million bags in 2012/13 to an estimated 4.4 million in 2013/14, raising concerns over the size of the current 2014/15 crop, which started in April. Moreover, the continued increase in domestic consumption in Indonesia is likely to put further pressure on supply availability.
Finally, according to Conab, private stocks of coffee in Brazil amounted to 15.2 million bags at the end of March 2014, before the start of the 2014/15 crop. This is 9.2% higher than the previous year, and follows two consecutive high crops of 50.83 and 49.15 million bags in 2012/13 and 2013/14. However, given the lower crop expected in 2014/15 of 44.57 million bags, it is likely that much of these stocks will be necessary to keep the market supplied.
It must also be kept in mind that the global stocks-to-use ratio is significantly lower than in previous years, currently standing at around three months of demand, compared to over eight months ten years ago. This leaves the market in a relatively vulnerable position, with global demand likely to exceed supply in the near future. Some of this demand can be met by stocks, but this situation offers significant potential for other origins to meet the shortfall.