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Harvest Origin Report - Brazil

Welcome to the second origin report from Ally Coffee. In this edition we take a look at Brazil as it reached the height of the harvest season and is now in full preparation to ship coffee around the world.

The World Market

C-Market Analysis

C Market Candlestick Chart, August through October
Source: Tradingview

Above is the candlestick chart for the ‘C-market’ over the last two months, specifically for the December delivery month. In September we witnessed a lot of downward pressure in the C-market after a price surge in July and August. Between September first and September 30 the market lost 16.06%, including a particularly rough day on September 14 when the market lost 7.47%, for a total loss of 9.84 cents per pound. The market found support some days later at the $1.08.25 level from which it bounced back to $1.10.85 where it closed for the month. The $1.10 mark has been resistant for the last two years and the market has not been able to support that level consistently. Every time the $1.10 mark is broken the market reaches $1.30, but quickly falls back down to well below the one dollar mark. Perhaps the latest surge can inspire enough confidence in the market to sustain the $1.10 level.

Flowers in Espirito Santo, Brazil

Global Coffee Industry Statistics and Analysis

Below are the production, export, and consumption data as of October 2020 published monthly by the ICO. Moreover, the graph below shows the composite index of prices paid for coffee shipment including robusta coffee. This graph can be interpreted as the ‘real’ price paid for coffee globally.

Global coffee production in 2019/20 is estimated at 169.34 million bags, 2.2% lower than last year, as output of Arabica decreased by 5% to 95.99 million bags, while that of Robusta rose by 1.9% to 73.36 million bags. World coffee consumption is expected to decrease by 0.5% to 167.81 million bags as the covid-19 pandemic continues to put pressure on the global economy and greatly limits out-of home coffee consumption. As a result, coffee year 2019/20 is seen ending in a surplus of 1.54 million bags. This compares to a surplus of 4.4 million bags in 2018/19. The two consecutive surpluses have limited a recovery in prices, which remain below the long-term average of 135.34 US cents/lb between 2007 and 2018. The ICO composite indicator in September rose by 1.3% to 116.25 US cents/lb. It averaged 107.25 US cents/lb in coffee year 2019/20, 6.7% higher compared to 2018/19. All group indicator prices rose in September 2020 for the third consecutive month, with the largest increase occurring for Other Milds. 
In August 2020, world coffee exports fell by 7.5% to 10.04 million bags compared to August 2019. This was the lowest volume of shipments in August since 2015 when exports totalled 9.14 million bags, and may indicate a decline in demand, particularly as prices have increased in recent months while the outlook for global economic growth remains bearish. Shipments of Arabica fell by 6.7% to 6.35 million bags, and Robusta exports decreased by 9% to 3.69 million bags. Other Milds recorded the largest decrease in August, falling by 10.2% to 2 million bags. Exports of Colombian Milds fell by 8.4% to 1.19 million bags, and Brazilian Naturals declined by 3.6% to 3.16 million bags.
ICO Composite Indicator Daily Price Chart

Source: International Coffee Organization

At Origin

Brazil General Update

During the third quarter of 2020 the Brazilian economy maintained the trajectory of recovery after the pandemic of COVID-19 began in March and April. The gradual easing of restrictions on people's mobility, the extension of emergency aid, an expansion of credit to micro, small, and medium-sized companies with Treasury guarantees, and the expansionary monetary policy, have all contributed to the recovery observed since May. The economic activity data released since June indicates that the economy is set to grow again in the third and fourth quarters of 2020. This is thanks in part to the continued easing of mobility restrictions and the implementation of other measures enacted in June. The data originally indicated that the economy would recover part of the second quarter losses and end the year with a decrease of 6%. However, in the first months of the third quarter, the observed performance of part of the economic activity indicators allows for a more optimistic expectation. As a result, the projected drop in GDP for the year was revised from 6% to 5%, while projected growth for 2021 was maintained at 3.6%.

Harvest in Numbers and Statistics

The latest survey by the National Supply Company (Conab) shows a harvest between 57.2 and 62 million bags, which represents an increase of 25% relative to the crop year 19/20. Coffee growers show a high quality crop, as the weather conditions of the past few months have favored the proper development of the fruit. The price of coffee in the domestic market rose by almost 50% between the end of September 2019 and the first half of April 2020.

High production, good quality, and high prices—these three factors rarely coincide. For this reason, it is essential that coffee farmers prepare themselves properly for this harvest. Proper preparation can help ensure profit and compensate for the poor results of 2019, a year that was marked by low prices and lower quality than we currently see in the 2020 harvest.

Yellow Coffee Cherries in Brazil

Coronavirus Impact

FALL IN EXPORTS: The main commodities produced by Brazil have been suffering a price drop in the international market, including soy, corn, and coffee. Major buyers of Brazilian agricultural exports, including Europe and China, have felt major effects from the COVID-19 pandemic. This has decreased purchasing from these important trading partners.

PRODUCTION FLOW DIFFICULTY: There has been great difficulty in receiving new purchases in warehouses. Warehouses are crowded and there has been lower export flow. This situation may last for a few weeks yet. We believe that in mid-September, due to a possible increase in the volume exported, there will be a release of space in warehouses with better flow.

INCREASED PRODUCTION COSTS: Fertilizers and other agro-chemicals for coffee cultivation are tied to the value of the US dollar. Compared to the Brazilian real, the dollar has grown stronger since the start of the pandemic. This has resulted in higher production costs in Brazil by effectively making these products more expensive for producers.

2019-2020 for Ally Coffee in Brazil and Future Outlook

Our main focus is to maintain and improve the high level of service we have in Brazil, and to be prepared for growth. We have a strong and established structure in Brazil, allowing us to grow capacity to meet demand, as well as to offer a variety of services including logistics, sustainability, quality, education, and more.

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