"When the best is gone, the best remains."
With the gaping hole left by the discontinuation of the GCA stock report, the ECF stock report is more valuable than ever. Seasonally, we were expecting stock build in April, which we did receive but a bit slower than usual. However, what catches attention is the increasing share of Robusta for the European coffee.
This follows the demand story that we have heard repeated over and over again. Arabica is not in demand due to high prices, and roasters have adjusted their blends to the cheaper Robusta market, which has fueled the futures market rally there.
However, we do have a strange dynamic at play here where destination stocks are quite low, but this does not seem to reflect tightness. Reports from origin indicate that demand is very weak. Exporters the world over, but especially in the Western hemisphere report high levels of stocks unsold to the broader market.
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Some of these stocks are the residue of unfortunate political decisions, such as the official exchange rate of the Ethiopian Burr being very overvalued which has stymied the country's ability to export coffee and unseasonal stocks have built up as a result. Others seem to be a more direct result of weakened demand. Physical prices are a strong indication of demand and we have seen differentials (as implied by ICO Prices) decimated over the last several months.
Accordingly, we have heard from both roasters and exporters that demand for these coffees is weak. Roasters have already made their purchases for the year and exporters are sitting on expensive inventory.
There is another factor that is likely contributing to the shift in inventory from origin to destination: the market structure.
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The hefty inversion observed in both Arabica and Robusta markets puts a heavy penalty on storing large amounts of coffee at destination so importers seem to have shifted the burden to origins where it is cheaper.
Freight is cheap at the moment so this makes a just-in-time inventory plan attractive.
The demand story leads us to ponder if the weak demand is indicative of a shift in consumption patterns. While demand has picked up as people return to offices, schools, and travel post-pandemic, a portion of the workforce continues to work from home permanently. Additionally, consumers feeling pinch from inflation may be less inclined to visit coffee shops, to travel and to go out to eat. This seems to be confirmed somewhat by the latest report from the ECF that reports that imports are still down vs 2016 levels.
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Certified stock reports also seem to track with European stocks as we see Arabica down and Robusta increasing in those reports. However, we are surprised by the accelerated pace of the recent drawdown. ICE stocks are now below 600k bags compared to our projection of 630k bags at the beginning of the month. We don't see a huge incentive to consume these old coffees when fresh coffees are flowing, freight is cheap and prices are dropping, but perhaps it is stock holders getting weary of the carry?
From Premium Coffee Market Reports 5/1/2023
Going forward, the inverted market structure complicates stock projections. Our general view is that certified stocks are likely to increase based on the availability of unsold washed arabica, the current harvest in Brazil, the inversion and the steep downward trend in differentials. This in turn, should lower the inversion back towards carry.
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However, aside from a standard seasonal stock build, we don't see destination stocks rebuilding to previous high levels until the inversion is reversed and coffee is cheap, perhaps when we receive the surplus coming from the 24/25 crop.
In the mean time, we watch the differentials and the development of the current harvest in Brazil. So far, we have not heard of anyone making major revisions to their forecasts and we suspect that the consensus will come in around 65 million bags. We also observe to see if the unsold washed coffees sitting in origin find a home on the exchange.
The market is not used to being inverted for so long and it is changing the economics of how coffee is stored around the world. Until we see a return to more normal market structure, I don't think that we can draw the same conclusions about the impacts of stock levels on the market.
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