There is no doubt that the arabica crop in Brazil in 2020 was excellent, both in quantity and quality. This last attribute is due to the fact that there was no rain during the harvest period, so no rain was good for the quality of the 2020 crop, but terrible for the quantity to be harvested in 2021.
Between July, August, September and October of 2020, the peak period of the Brazilian harvest, there were massive sales by producers for the export sector, the discounts were generous because the KC was also higher than now, remember that in a harvest there is a natural pressure to sell, because it is necessary to pay for the harvest, and in a large harvest, the harvest is large and so are your expenses.
Example: So the big exporting companies bought coffee from producers at a discount of minus 20, against a sale at ICE of minus 6, which is Brazil's discount, and there are the inherent expenses of preparing the coffee, plus freight, until the coffee is placed in warehouses accredited by ICE.
So certified coffee belongs to the large international trading companies.
As time went by, there was a drought, and the trading companies know that the amount Brazil will export is much lower, and they also observe the movement of other countries producing and exporting less, so the trading companies will not deliver certified coffee on ICE, but will buy back their positions in the first position and sell simultaneously in the second position. This is called cash in carry.
When coffee stocks in importing countries actually decrease due to lower world exports, these certified coffees start to appreciate in the spot market, the premiums on the ICE basis start to rise, for example, a Colombian coffee is now worth 45 cents more. So these Brazilian certified coffees that are of excellent quality and are semi washed will be sold with premiums. The premium will depend on supply and demand at the moment.
They may be sold at an additional 50 cents. It will depend on how much the roasters will need.
If in July, in the Northern hemisphere summer, the pandemic of COVID is under control, and life returns to normal, thousands of small roasters will have to go back to their activities and replenish their stocks. So it is a strategy to keep these stocks in Europe, financed with the lowest interest rates, below 1% per year.
When the trading company sells the coffee to the roaster at a premium, it simply repurchases its sale on ICE.
ICE has served as a hedge, the certification of coffee on ICE is serving to attest to the quality and the trading company to raise funds for financing stocks at low cost.
So the more Brazilian coffee is certified on ICE, the less pressure there will be on the SPOT market in Europe and the USA.
Honduras, once a great certifier of coffee on ICE, due to its fall in production, stopped certifying coffee on ICE, because currently they sell coffee with premiums of 25 cents.
The cited values are approximate, only to explain the functioning of commercialization.