What does Disaster look like for Coffee? 170c and beyond...

Those of us following the #coffeemarket, know that there was heat damage that caused flowers to abort from the #coffee trees in #Brazil, the world's largest producer of #Arabica. But what does that actually mean for coffee prices? First, we are talking about permanent damage to the crop.

If flowers abort, then no amount of rain after that period will make new beans, so we are talking about a hit to production on top of an already down year on Brazil's biennial production cycle.

Reputable #coffeetrade houses and #coffeeanalysts have estimated a >30% decline in production with some calling for as much as 40% down. That translates into a 10mm bag deficit in in coffee from the Brazil hit.

Now there are some mitigating factors here, notably #Coronavirus resurgence. For all of the success that we have seen in implementing a vaccine in some countries, others in #Europe and #LatinAmerica have seen the situation decline considerably.

I remain optimistic (maybe to a fault), that the #vaccine distribution will only accelerate, but its worth noting that a coronavirus resurgence could dampen #demand.

Even still, coffee consumption remains stubbornly sticky so I suspect that even a pessimistic coronavirus scenario will not come close to erasing the deficit. *Price Impact* My #pricemodel uses #GCA stocks, #certifiedstocks and #BRL as variables to output monthly avg price. In the graphic below you can see the GCA seasonal stocks in the top left corner.

This holds a roughly inverse relationship with price, so lower stocks = higher price.

A 10 mm bag deficit globally implies 1.6m deficit in #USA (~16% of global market). Applied to the GCA coffee stocks potentially means a decline of 1.6 mm bags over the next 12 months. That seems an almost unthinkably low number, but that is how the numbers work out. That input, applied along seasonality shows Arabica prices rise by 35c over the next year, applied to current prices that is 170c. However that doesn't say anything about BRL, today for example, the BRL firmed through 3.5 support level which provided a solid boost for KC. Given all of the bad economic news about Brazil lately due to Coronavirus, we could very well have already reached maximum pessimism. If BRL continues to firm that could another 20c to coffee's rally.

Currency is a fickle thing though, and if dollar strengthens or BRL weakens it could just as easily become a drag on price. Finally, the important thing to remember about coffee is that it is forward looking. The coffee market participants are always discounting the present and looking toward the next big story.

The post harvest bloom period will be essential this year, if there is a big crop coming, then coffee will decline as we anticipate refilling stocks. But if weather causes damage at that point, then we are talking about damage to an already low base, and that's when we could see $2 and $3 coffee.