What a week that was. We saw the market move sharply higher with each day a wider trading range than the day before it. For example, the range for Wednesday was about 11 cents, Thursday was about 15.50 and Friday was 22. So far this morning we’ve had another 16.2 cent range as we write this. It’s easy to forget that June closed at 159.75 and we’re now trading just under 50 cents per lb. above that number, in a few days less than a month. The recent low of 147.65 was made on July 7th. Volumes have soared, for example so far today Sept C has traded 25331 lots as we sit and write, amazing.
What’s behind all of this? Well, most important, cold weather in Brazil. Late Monday night into Tuesday morning, an unexpected frost hit some areas of South Minas and Cerrado. Each day from that point, it seemed like more information came over the email and other media. Pictures of trees stressed by frost started heavily circulating. To this point, damage estimates range from 1-5 million bags with consensus about 3-5 in most camps, we’ve even seen one estimate up to just about 6 million bags. Put this on top of the drought Brazil suffered in the formation of the crop coming now, and we’ll have yet another low crop in 2022/23. Lump in transportation troubles in Africa and Asia, and a roaster community that’s been running on just in time inventory for years now, many of which who have not experienced cold weather like this.
And now comes a forecast for the end of the week, we’re going to post it here with the usual warning that this is just one man’s opinion. You should consider it along with everything else you are receiving from trusted sources.
Below is what we think is a credible report we received from Mike Palmerino. He is a coffee weather veteran meteorologist whose services we used for over decade many years ago.
Major freeze event heading for the coffee belt.
Guidance indicates high pressure of 1036 mb will build into west-central Argentina on Wednesday. The high will move into Paraguay and northern Argentina on Thursday and southern Brazil on Friday. Once it is over southern Brazil it will be slow to move out. This could allow for multiple days of frost and freeze conditions in the coffee belt. Our current forecast calls for temperatures of -2 to +2 celsius on Thursday and Friday mornings, -1 to +3 on Saturday morning and 0 to +4 on Sunday morning. The dryness of the air and the persistence of cold high pressure at the surface will maximize the ability to produce damaging cold in the coffee belt. All areas are threatened.
Only a few light showers are expected with the cold frontal passage on Wednesday.
Tracking Coffee Weather since 1978
If this occurs, the market will be completely focused on Brazil and the damages near 3 days of very cold weather might do in the heart of the coffee belt.
We’ve already started to hear about origin defaults – producers not delivering parchment/raw coffee to exporters who bought it when the market was much lower (again, that didn’t have to be very long ago).
Trade houses have been faced with a choice of lifting hedges which can be a dangerous
proposition. Margins were increased by ICE for arabica coffee contracts from $4050 per lot to $7500 which exacerbates the problem.
Lets’ talk about the COT quickly. The disaggregated COT issued on Friday for trading as of Tuesday July 20th showed long funds buying 5595 lots and are up to 57,586 lots long, Short funds also bought, 5562 lots and are 18,239 lots short. Surely there’s been more buying by both parties since. Origin/Trade were the best sellers 10,940 lots in total.
ICE stocks in all hands 2,177,706 bags of which 1,781,598 bags are in Antwerp.
We say above that much of the generation that run the coffee companies, haven’t traded a market like this but in truth, no one really has. This market has many unique challenges that would exacerbate any move brought on by this cold weather. Interesting times you know how we feel about you.
If we can be of help, please let us know.
All the best,
The Armenia Team