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Worst-Case Coffee Frost in Brazil

Last night frost was reported in Sul de Minas, the largest production area in Brazil. The extent of damage is not yet known, but the fact is that there WAS frost and that it occurred in one of the largest production areas. As one analyst friend put it succinctly to me, the reports on the ground come in 3 camps: "no damage", "some" and "loads". I'm going to provide my analysis on the damage below, but I want to start by saying, it is not the markets job to price the damage in right now, it is the market's job to price in RISK.





The risk is this: we have a significant deficit in 21/22 already, the market is counting on 22/23 to recover the deficit, if the frost has damaged that capacity significantly then the market will have to price ration coffee. That is the risk and the reason why I have titled this "Worst-Case Coffee Frost".


This risk is further exacerbated by continued cool forecasts. More on the forecasts below, but first let's talk about risk.


Since emotion is a major factor in the markets, risk is painted in broad strokes. First the market overcorrects to the upside to encapsulate as much potential risk as it can conceive. If the damage is overstated, emotions will cool down, and the market will correct.


This is what is happening at the moment, the market gapped open and +4c and has rallied to +10c today as of 11am.


My estimate for the impact of a catastrophic frost is typically about 95c to the market. Every year, the market prices in some small percentage of that risk right in the beginning of the season and then adds more or subtracts less along with the forecasts.


Yesterday, the forecasts showed substantial risk of frost in the coffee regions, but given the recent overblown frost reactions in the market and the macro sell-off, the market ignored the risks. Here is an excerpt from my Premium Reports dated 7/19/2021:


"Frost Update:

It is the Canadian model showing the most significant risk, and as I have previously mentioned, this model skews colder. As you can see from the below graphic there is substantial risk in the MG region. Normally this should excite the market but apparently they are experiencing frost fatigue.

The GFS model shows no risk and the Brazilian frost monitor shows high risk across the MG/SP region.

Speedwell, my paid weather service, confirms frost in the Sul de Minas region but limited to two weather stations: "



Now, the market will have to take more seriously the forecasts for the next couple of days. The forecasts are showing some risk in the southern region of Minas Gerais and Parana, but not nearly as strong as yesterday.




In terms of actual recorded temperatures. This is what I have heard:

-4.4 C in Maria da Fé-MG, -2.3 C in Cape Verde-MG, -1.6 C in Guaxupé-MG, -1.4 C in Passos-MG, -0.3 C in Caconde-MG, - 0.3 C in Bambuí-MG, 0.7 C in Carmo do Rio Claro-MG.


Damage Guestimates:

To use round numbers, let's say there was 20 mm bags of production in Minas and 30% of the region was affected by frost, that's 6 mm bags at risk. If 30% of those bags are lost, that's a total loss of 1.8 mm bags. Those are pretty big numbers though, if only 10% of the region was affected that 1.8 mm bags at risk. If 10% of those are lost, that's only 180k bags. So as a rough-out, I think we can put the damage estimates in the 200k to 1.8 mm bag range with an average guestimate of 1.0mm bags.


By itself, a 1.0 mm bags loss is not a catastrophe. However, it does move the needle for fair value of coffee higher. Frost damage is very difficult to quantify because estimating production off a new growth is a very inexact science. Furthermore, a lot will depend on what happens between now and the next crop. The rains will matter, the cost of inputs will matter and the price of coffee will matter to how much is produced next year. For now, we will continue to update you with the best estimates that we can find.


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