On Jun 9th, 2022 we met with Heberson Sastre, the head of the Minasul trading desk and a coffee trader with almost 30 years of experience in coffee.
Over the course of an hour, he provided us with his view on the Brazilian harvest, forecasts and challenges for the market, weather, demand, prospects for the BRL and finally, his outlook for coffee prices. In the paragraphs that follow we cover some of the highlights of his views.
Brazilian Coffee Market with Heberson Sastre - Part 1
For context, Brazil is the world’s largest coffee producing country and they are in the midst of an inflection point that may dictate the future of prices and the whole supply chain.
Minasul as a company, is well situated to comment on this key market as they are a Brazilian coffee farmer cooperative that trades ~2m bags per year (around 5% of the country’s Arabica market) and counts over 6 thousand producers under its wing. This coffee giant is also located in Varginha, which is a south of Minas city in the heart of the coffee areas from Brazil.
Logistics are already improved from the bottlenecks brought by the pandemic (at least on the exporting side). Brazilian exporters are now able to schedule bookings, get shipping’s and containers to send the coffee abroad more easily.
Manpower is also improved in the ports and this is helping the flow of containers.
Brazilian exports reflect the improved logistics as they are in line with the seasonal expectations of a lower on-cycle crop.
The fertilizer price outlook is still uncertain given the inability to make forecasts on the Ukraine-Russia conflict. However, over the last 20 days prices have been dropping. Minasul’s general view is that producers should use cost averaging, by dividing their purchases throughout the year, as a way to lower exposure to price oscillation.
Weather is seen as the major driver for the current season, mainly because of the frost risk brought by cold fronts and the Brazilian winter (starts June 21st).
Lower precipitation rates over the last months in Brazil’s growing areas are not positive for the 23 crop but are also not a major concern at this point, as long as it doesn’t extend for months moving forward.
Heberson also cautions about hedge fund positioning and how specs can be a major influence over prices during this weather market period.
Local currency - BRL
The BRL has been quite sensitive to other Central Bank’s movements. The large Selic increase brought by the BCB took the currency higher, but as soon as the foreign CB’s started moving their own rates, the BRL has been volatile. There is competition between the high selic rate and the improving trend of other reserve currencies.
Heberson sees a BRL around the 5.0 level and doesn’t expect it to improve considering that now it’s the rest of the world’s turn to raise their rates. He also discusses the correlation between BRL movement and producer selling, ie the producer gets a better price when the currency is weaker, so we see more selling.
According to Heberson, one of the main challenges ahead for coffee prices is global inflation undermining the coffee industry’s capacity to sell coffee, which means that consumption is likely to back off. As consumption is a key component of price discovery, lower consumption can have a negative impact on global prices.
This concern is echoed by many top economists who are warning that key destination market economies in US and Europe may be headed for recession.
These highlights are only a limited part of the broader conversation on the global coffee market, but is from the perspective of an insider who has been trading coffee for almost 3 decades. He underscored the inflection point that Brazil, and therefore the global coffee market, is in right now.
In the podcast and videos, he goes into more detail on the Brazilian harvest, producer challenges, price outlook, calendar spreads and differentials—all important components of the exporter’s worldview. While Heberson seems to consider bearish factors such as 2023 supply and reduced consumption, he is also cautious of the upside, especially as we go into Brazil’s winter.