Marketing Communication April 2017 Coffee Outlook Q1 2017: Stocks will be needed Agri Commodity Markets Research RaboResearch Food & Agribusiness far.rabobank.com Carlos Mera +44 (0)20 7664 9512 Summary Revisions in our numbers yielded smaller global deficits in 2015/16 and 2016/17, but an increased deficit in 2017/18. It is still too early to calculate 2018/19 S/D, but given normal weather we should see a large surplus, especially in arabicas. We expect the spreads in the nearby arabica contracts to flatten, and reflect a tightening physical market, at least until July 2018. A large arabica deficit in 2017/18 means that the market structure will have to punish carrying stocks. If we see a good return of the rainfall in Brazil in September/early October, the expectation of a huge arabica crop in 2018/19 will weigh on the market at a time of declining global stocks. This could cause Brazil arabica differentials to get close to level money in 1H 2018. Disappearance in Q4 2016 came in extremely high, but there are signs of weakening. Production Our Brazil 2017/18 coffee survey found a little less coffee than expected. The main cause for the drop in Brazil arabica production this year is not the product of any pest or disease, but results from the high number of pruned or otherwise unproductive farms (resting from last year s bumper crop). This increases our expectations for a bumper, yet to flower, 2018/19 arabica crop. Colombia registered production from October 2016 to February 2017 came in at 6.9m bags, a jump of 8.8% YOY, confirming an excellent main crop. Given the strength of the main crop, we think this pace will not be sustained for the remainder of the crop year, and, assuming a mitaca similar to last year s, we come to an estimate of 14.6m bags, 0.2m bags above our previous estimate. Exports from Honduras have been impressive, surging 43% in the first half of the crop year. But we assume there is quite a bit of front loading and therefore we only assume a 23% increase in annual production, to 6.4m bags. We now estimate the 2016/17 Vietnam harvest to be 7% lower YOY, with the quality severely affected by the rains during the harvest (and the less than perfect drying). But at the same time, our expectations for Vietnam's 2017/18 season are, in principle, for a record crop. The abovenormal rainfall levels should have filled the reservoirs and the trees should have a lot of energy after carrying a lower cherry load last year. We have increased our estimate for Indonesia 2016/17 based on the large amount of exports so far in the crop year, but reduced the estimate for 2017/18, as there are a few reports confirming that Indonesia will see little recovery this year due to strong rains (In Indonesia, rainfall can often be excessive). Demand Disappearance came in extremely high in Q4 2016. The 2016 calendar year saw disappearance in the EU28 at 45.9m bags, which is a 4.4% increase YOY. This is an extremely high growth rate for such a mature market. Japan saw disappearance increase by 3.9% to break above 8m bags 1/5 RaboResearch Coffee Outlook Q1 2017 April 2017
whereas US disappearance came in at a good 3.5% increase to 25m bags. Disappearance in 19 other non-producing countries for which we have full 2016 trade data, came in 6.3% higher YOY. That means that non-producing country disappearance is up by 4.5% YOY, or an impressive 4.2m bags. It is hard to imagine all this coffee is simply consumption, and we assume much is due to an expanding pipeline, caused by very low interest rates and an arabica curve that has been firmly in contango. But even assuming a more moderate rate of growth in the underlying demand, we have to increase our global demand estimate by 0.5m bags to 153.8m bags in 2016, a 2.3% annual increase. If this rate of growth is sustained, global demand will easily surpass 160m bags by 2018. However, the National Coffee Association convention in Austin two weeks ago saw very little coffee being bought, which was likely the reason of a weak market in the days that followed. The expansion of the pipeline in 2016 seems to be taking a break, at least in the US in 2017. Figure 1: Four-quarter rolling disappearance in the EU and US Figure 2: Disappearance in other non-producing countries 47 30 20 10 46 45 44 43 42 28 26 24 22 20 19 18 17 16 15 14 13 9 8 7 6 EU28 US (RHS) Other 19 Non-Producing countries Japan (RHS) Source: Official customs data, GCA, Rabobank 2017 Source: Official customs data, Rabobank 2017 S/D balance We have made upward revisions to both production and demand in 2015/16 and 2016/17, with a net result of lower deficits in both years. However, the inclusion of our Brazil 2017/18 coffee survey, together with cuts in Indonesian production, results in a larger deficit in 2017/18. We now estimate a global coffee deficit in 2017/18 of 5.3m bags, with an arabica deficit of 2.7m bags and a robusta deficit of 2.6m bags. So we are in the unusual situation of a stocks-to-use ratio heading to a very low level by the end of 1H 2018 but a futures market which will likely reflect a potentially monstrous Brazil arabica crop in July 2018. Futures will come under increasing pressure if there is no frost over the Brazilian winter and we see a good flowering in September/early October. But, in that case, the physical market will become much tighter than it is now, with Brazil arabica differentials getting closer to level money. Stocks in non-producing countries remain at very high levels a product of the weakness of the Brazilian real over the last two-and-a-half years, the arabica curve being in contango, and low interest rates in non-producing countries over a number of years. We believe much of this coffee is going to be needed in the coming 15 months, and therefore, the arabica curve will have to become flatter in order to punish the carry of stocks. This will likely happen in the spreads between now and July 2018. However, there are two distinctive episodes that may put pressure on prices and make the spreads widen. One is the grading of Honduras coffee in the coming four months, which we roughly estimate at half a million bags, but could potentially be higher. The other factor is the return of normal rains in Brazil in September. We believe, however, that these two factors will only have a temporary effect on the structure, all things considered. 2/5 RaboResearch Coffee Outlook Q1 2017 April 2017
In the meantime, declining global stocks will mean that any weather effect will have an exacerbated price impact. As of Friday 7 April, implied volatility on the second contract in arabica stands at 26.8%, and in robusta at 23% relatively low levels. Volatility will likely increase as destination stocks are drawn down. Coffee global S/D balance Million bags (60kg each) 8 6 4 2 0-2 -4-6 -8 12/13 13/14 14/15 15/16 16/17f 17/18f Arabica S/D Robusta S/D Stocks/use (right axis) 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% S/D balance (crop year) 12/13 13/14 14/15 15/16 16/17 17/18 Production 150.0 153.8 145.4 152.3 154.0 153.0 Brazil 54.5 56.1 49.4 50.0 54.0 49.2 Vietnam 25.1 27.5 26.5 28.4 26.3 28.7 Indonesia 12.5 12.9 11.0 12.8 10.9 11.6 Colombia 9.9 12.1 13.3 14.0 14.6 15.0 Other 48.0 45.2 45.3 47.1 48.2 48.6 Demand 144.0 147.1 149.4 152.6 155.5 158.4 Non-producing countries (Oct-Sep) 100.7 102.3 103.8 105.9 107.6 109.0 Producing countries (crop year) 43.3 44.8 45.6 46.6 48.0 49.3 S/D balance 6.0 6.7-4.0-0.3-1.5-5.3 of which Arabica 3.5 3.3-3.9-2.9 3.9-2.7 of which Robusta 2.5 3.4-0.1 2.6-5.5-2.6 Share of Robusta in non-producing countries 35.9% 36.3% 35.5% 35.6% 35.1% 34.0% Figures in million bags (60kg each). Source: Rabobank 2017 3/5 RaboResearch Coffee Outlook Q1 2017 April 2017
Imprint RaboResearch Food & Agribusiness far.rabobank.com Agri Commodity Markets Research: Stefan Vogel Carlos Mera Graydon Chong Charles Clack Head of ACMR, G&O Sector Strategist Commodity Analyst stefan.vogel@rabobank.com +44 (0)20 7664 9523 carlos.mera@rabobank.com +44 (0)20 7664 9512 graydon.chong@rabobank.com +44 (0)20 7664 9579 charles.clack@rabobank.com +44 (0)20 7664 9756 Rabobank Markets Corporate Risk & Treasury Management Contacts: Martijn Sorber Koon Koh Tan Terry Allom David Kane Arjan Veerhoek Neil Williamson Ricardo Rosa Global Head Asia Australia Europe Netherlands North America South America martijn.sorber@rabobank.com +31 30 21 69447 koonkoh.tan@rabobank.com +65 6230 6988 terry.allom@rabobank.com +61 2 8115 3103 david.kane@rabobank.com +44 (20) 7664 9744 arjan.veerhoek@rabobank.com +31 30 216 9040 neil.williamson@rabobank.com +1 (212) 8086966 ricardo.rosa@rabobank.com +55 11 5503-7150 4/5 RaboResearch Coffee Outlook Q1 2017 April 2017
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