“Frost in Brazil.”
Whisper the phrase in a trader’s ear and watch the market ticker spin.
Tragically last week, an unexpectedly severe weather system hit 3 coffee-growing regions in Southeastern Brazil (the states of Minas Gerais, São Paulo [Mogiana], and Paraná) at a time when many of the coffee plants were already weakened by drought. It seems at this time that South Minas may be the hardest hit.
The total losses are unknowable at this point, but the damage is thought to be greater than initially expected. One of our supply partners put the losses at an estimated 4.5 million bags after flying over the affected areas. This represents perhaps 8-10% of the annual estimated yield from the country (depending on who is doing the counting).
In response, this week the “C” market spiked roughly forty cents, approaching $2 per pound, closing this week at the highest level since late 2016. Major shipping delays and port congestion have already made 2021 an incredibly challenging and costly year for the specialty coffee industry. While 4.5 million bags may not sound completely catastrophic in and of itself, in the context of the past year’s events it’s worth considering the big picture.
What Does It Mean?
“The estimated 4ish million bag loss may seem meager in the scope of Brazil’s usual annual production of approximately 50 million bags, but the foundation for a major move had been laid with worldwide supply chain issues, overall commodity basket volatility, drought, and social unrest in other major producing countries,” notes Alex Mason, a 28-year veteran of the specialty coffee industry and VP of Trading Activity at Royal Coffee.
“This convergence of factors, coupled with an increase in production costs for all coffee producers because of higher fuel and fertilizer costs have kept premiums at origin very firm. Roaster demand is returning, and physical stocks are tight. The only question that remains unanswered is how long the fund money wants to keep the momentum going and where the new normal “C” level will be.”
What Should I Do?
In practical terms, for the coffee buyer, we’d recommend keeping a cool head, covering yourself for the near term, and having a little patience.
“With this potentially looking like the first really damaging frost in decades, and only the third time that coffee futures have approached the $2.00 level since the late 1990’s, it is easy to panic,’ says Max Nicholas-Fulmer, CEO of Royal Coffee. “Our advice is to think in shorter time horizons than you may be used to. Many roasters have gotten in the habit of buying for an entire year. Right now, it seems prudent to think in terms of 60 days (about 2 months) at a time. Make sure you have some coffee booked, roast and sell what you need, and check back with us when you have depleted that supply by half. The reality is that a $2.00 market is not that bad. Many roasters can be successful with an average green coffee cost well above $3.00.”
It’s impossible to predict the long-term implications of this single event, and much less the ongoing frustrations of a dynamic system involving constant climatological and logistical flux.
There are a few silver linings, however. For roasters, incoming coffee volumes are looking better than two months ago, and we’re receiving highly-anticipated coffees from our supply partners in Ethiopia, Kenya, and Central America. For some growers, it’s possible that a weather-induced market correction could lend itself to improved profitability in the near-to-midterm timeline, depending on factors like location, harvest timelines, and of course the transparency of the supply chain.
It’s very likely we’ll continue to see instability in the market, and it’s inevitable that climatic events will continue to disrupt traditional growing regions. It’s the extent of these circumstances that remain difficult to foresee or fathom.
For now, under the specter of a new challenge, the 2021 Brazilian coffee frost, we’ll continue to keep abreast of the situation and provide updates and perspectives.