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The price of Robusta and Arabica coffee

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Commerzbank commodities research

Coffee, low-yield yearCommerzbank commoditiesArabica’s years-long downtrend has led the price of this coffee to its lowest level since 2006 (see chart 10 below). For a brief time it was even feared that the price would fall below the USD1 per pound mark. Moreover, the price looks like it will remain muted going forward as well: if Brazil’s current low-yield year for Arabica couldn’t boost prices and the roya (coffee rust) epidemic affecting a large part of Central America was only able to lift them briefly, we see little hope for a trend reversal in 2014. Not only is production in Columbia likely to increase further in 2014, but above all Brazil is slated for a high-yield year.

No scarcity in view for coffeeIn fact, the term “low-yield year” has lost much of its edge due to the flattening of the 2-year cycle. This year Brazil posted a record high for production in such a low-yield year and in all probability will post a record-high for production in a high-yield year in 2014. In terms of aggregate coffee volume this could translate to an increase of 10m bags to 57m bags, and some estimates even go as high as 60m bags or more. That is anything but a signal of scarcity (see chart 11 below). Such estimates are supported not only by the good weather conditions so far, but also by the overall improvement in the state of plantation. The good state of plantations, however, is due not least to investments made following the high prices of 2011. The longer the low-price phase persists, the more the investment “dividend” will shrink.

Low prices, kaffeAs a minimum, the current low price phase will lead to lower yields in the medium term due to scrimping on fertilizer and crop protection. So far the plantations have continued to persevere despite prices that have often fallen below production cost – but they won’t be able to hold on indefinitely. The marked increase in production costs of an estimated 12% yoy combined with low prices is likely to lower the profitability of coffee farming further. Thus, for the longer run, the ICO views the assumption of a higher coffee supply as questionable. But for now, prices are not budging, not even after the auctions of the Brazilian government, in which options were arranged for planters to deliver 3 million bags to state stockpiles in March 2014. According to the ICO, this non-reaction indicates that the market is underestimating the impact of Brazil’s policy, which it believes is likely to lead to a “precarious” balance.

Surpluses on marketBut that is still a long way off: Following a number of deficit years, 2012/13 has already ended with surplus of about 3m bags as estimated by the ICO. It is still not clear how global production volume will turn out in 2013/14, as increases in Vietnam and Columbia – the latter finally having emerged from its roya Odyssey of several years, which necessitated new plantings of more robust strains – will be offset by decreases in Brazil and currently roya-plagued Central America.

Critical outlookAt present it seems there could also be surpluses in 2013/14 and 2014/15. The more diminished outlook for the years thereafter should, however, allow prices to rise slowly, so that after an intermittent low during the Brazilian harvest in 2014 we expect the price of coffee to recover to 110 US cents per pound in Q4 2014 and continue to rise thereafter.

Vietnam exportSince summer, Robusta prices have moved in a similarly negative fashion as Arabica prices after far outperforming them for a very long period. Nonetheless, Arabica prices remain low relative to Robusta prices when compared to their history. This should lead to a substitution of Arabica for Robusta in coffee consumption. The ICO believes this trend is already recognisable. The recent recovery of Robusta prices was largely due to the fact that Vietnam’s latest export numbers came in low despite what seems to have been a record-high harvest. The policy of holding back is apparently paying off, at least in the short run. We doubt Robusta prices will be able to escape the pressure of a plenteous coffee supply in 2014 and don’t expect its price to recover until the second half of the year – to a level of USD1,600 per ton.

Coffee price diagrams

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Brent prices slip on USD surge despite tight inventory conditions

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SEB - analysbrev på råvaror

Brent crude prices dropped by USD 1.4 per barrel yesterday evening, sliding from USD 74.2 to USD 72.8 per barrel overnight. However, prices have ticked slightly higher in early trading this morning and are currently hovering around USD 73.3 per barrel.

Ole R. Hvalbye, Analyst Commodities, SEB
Ole R. Hvalbye, Analyst Commodities, SEB

Yesterday’s decline was primarily driven by a significant strengthening of the U.S. dollar, fueled by expectations of fewer interest rate cuts by the Fed in the coming year. While the Fed lowered borrowing costs as anticipated, it signaled a more cautious approach to rate reductions in 2025. This pushed the U.S. dollar to its strongest level in over two years, raising the cost of commodities priced in dollars.

Earlier in the day (yesterday), crude prices briefly rose following reports of continued declines in U.S. commercial crude oil inventories (excl. SPR), which fell by 0.9 million barrels last week to 421.0 million barrels. This level is approximately 6% below the five-year average for this time of year, highlighting persistently tight market conditions.

In contrast, total motor gasoline inventories saw a significant build of 2.3 million barrels but remain 3% below the five-year average. A closer look reveals that finished gasoline inventories declined, while blending components inventories increased.

Distillate (diesel) fuel inventories experienced a substantial draw of 3.2 million barrels and are now approximately 7% below the five-year average. Overall, total commercial petroleum inventories recorded a net decline of 3.2 million barrels last week, underscoring tightening market conditions across key product categories.

Despite the ongoing drawdowns in U.S. crude and product inventories, global oil prices have remained range-bound since mid-October. Market participants are balancing a muted outlook for Chinese demand and rising production from non-OPEC+ sources against elevated geopolitical risks. The potential for stricter sanctions on Iranian oil supply, particularly as Donald Trump prepares to re-enter the White House, has introduced an additional layer of uncertainty.

We remain cautiously optimistic about the oil market balance in 2025 and are maintaining our Brent price forecast of an average USD 75 per barrel for the year. We believe the market has both fundamental and technical support at these levels.

Oil inventories
Oil inventories
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Oil falling only marginally on weak China data as Iran oil exports starts to struggle

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SEB - analysbrev på råvaror

Up 4.7% last week on US Iran hawkishness and China stimulus optimism. Brent crude gained 4.7% last week and closed on a high note at USD 74.49/b. Through the week it traded in a USD 70.92 – 74.59/b range. Increased optimism over China stimulus together with Iran hawkishness from the incoming Donald Trump administration were the main drivers. Technically Brent crude broke above the 50dma on Friday. On the upside it has the USD 75/b 100dma and on the downside it now has the 50dma at USD 73.84. It is likely to test both of these in the near term. With respect to the Relative Strength Index (RSI) it is neither cold nor warm.

Lower this morning as China November statistics still disappointing (stimulus isn’t here in size yet). This morning it is trading down 0.4% to USD 74.2/b following bearish statistics from China. Retail sales only rose 3% y/y and well short of Industrial production which rose 5.4% y/y, painting a lackluster picture of the demand side of the Chinese economy. This morning the Chinese 30-year bond rate fell below the 2% mark for the first time ever. Very weak demand for credit and investments is essentially what it is saying. Implied demand for oil down 2.1% in November and ytd y/y it was down 3.3%. Oil refining slipped to 5-month low (Bloomberg). This sets a bearish tone for oil at the start of the week. But it isn’t really killing off the oil price either except pushing it down a little this morning.

China will likely choose the US over Iranian oil as long as the oil market is plentiful. It is becoming increasingly apparent that exports of crude oil from Iran is being disrupted by broadening US sanctions on tankers according to Vortexa (Bloomberg). Some Iranian November oil cargoes still remain undelivered. Chinese buyers are increasingly saying no to sanctioned vessels. China import around 90% of Iranian crude oil. Looking forward to the Trump administration the choice for China will likely be easy when it comes to Iranian oil. China needs the US much more than it needs Iranian oil. At leas as long as there is plenty of oil in the market. OPEC+ is currently holds plenty of oil on the side-line waiting for room to re-enter. So if Iran goes out, then other oil from OPEC+ will come back in. So there won’t be any squeeze in the oil market and price shouldn’t move all that much up.

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Brent crude inches higher as ”Maximum pressure on Iran” could remove all talk of surplus in 2025

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SEB - analysbrev på råvaror

Brent crude inch higher despite bearish Chinese equity backdrop. Brent crude traded between 72.42 and 74.0 USD/b yesterday before closing down 0.15% on the day at USD 73.41/b. Since last Friday Brent crude has gained 3.2%. This morning it is trading in marginal positive territory (+0.3%) at USD 73.65/b. Chinese equities are down 2% following disappointing signals from the Central Economic Work Conference. The dollar is also 0.2% stronger. None of this has been able to pull oil lower this morning.

Bjarne Schieldrop, Chief analyst commodities, SEB
Bjarne Schieldrop, Chief analyst commodities, SEB

”Maximum pressure on Iran” are the signals from the incoming US administration. Last time Donald Trump was president he drove down Iranian oil exports to close to zero as he exited the JCPOA Iranian nuclear deal and implemented maximum sanctions. A repeat of that would remove all talk about a surplus oil market next year leaving room for the rest of OPEC+ as well as the US to lift production a little. It would however probably require some kind of cooperation with China in some kind of overall US – China trade deal. Because it is hard to prevent oil flowing from Iran to China as long as China wants to buy large amounts.

Mildly bullish adjustment from the IEA but still with an overall bearish message for 2025. The IEA came out with a mildly bullish adjustment in its monthly Oil Market Report yesterday. For 2025 it adjusted global demand up by 0.1 mb/d to 103.9 mb/d (+1.1 mb/d y/y growth) while it also adjusted non-OPEC production down by 0.1 mb/d to 71.9 mb/d (+1.7 mb/d y/y). As a result its calculated call-on-OPEC rose by 0.2 mb/d y/y to 26.3 mb/d.

Overall the IEA still sees a market in 2025 where non-OPEC production grows considerably faster (+1.7 mb/d y/y) than demand (+1.1 mb/d y/y) which requires OPEC to cut its production by close to 700 kb/d in 2025 to keep the market balanced.

The IEA treats OPEC+ as it if doesn’t exist even if it is 8 years since it was established. The weird thing is that the IEA after 8 full years with the constellation of OPEC+ still calculates and argues as if the wider organisation which was established in December 2016 doesn’t exist. In its oil market balance it projects an increase from FSU of +0.3 mb/d in 2025. But FSU is predominantly part of OPEC+ and thus bound by production targets. Thus call on OPEC+ is only falling by 0.4 mb/d in 2025. In IEA’s calculations the OPEC+ group thus needs to cut production by 0.4 mb/d in 2024 or 0.4% of global demand. That is still a bearish outlook. But error of margin on such calculations are quite large so this prediction needs to be treated with a pinch of salt.

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