by Jim Roemer - Meteorologist - Principal, Best Weather, Inc.
Given the Russia-Ukraine tensions and fluctuations in the U.S. dollar, I would be very careful in this environment. We are beginning to see stock market indices entering, or nearing, bear market territory, while crude oil and gold rally on the crisis in eastern Europe.
So, which markets will be impervious to the tensions overseas and more weather and crop related?
Back to the weather: The South American drought is the worst in 35 years in parts of Paraná and other states, helping soybean prices to soar 20% since December.
I continue to see weather problems for the U.S. wheat crop, while rains are in the forecast for Argentina and southern Brazil next week for corn and soybean crops. For cocoa, it remains mostly dry for west African production, but it will not be until the spring and summer when the trade is convinced whether or not global cocoa production will be in a deficit. Finally, while floods have hit parts of northern Brazil, most of the coffee crop has had excellent vegetative growth. This has prevented coffee prices from making new highs recently.
There is a flight to safety in commodities such as gold and crude oil, while stocks have topped out in some markets.
Landslides from flooding hit northern Brazil. Why have coffee prices not reacted?
Brazil, the world’s largest coffee producer, has enough stocks to guarantee supplies, despite recent weather problems that have affected coffee plantations, although logistics continue to pose difficulties. Nicolas Rueda, president of Cecafé (Brazilian Coffee Exporters Council) stated, “This is not a time of high inventories, but they are enough to supply the local and international industry”.
Rueda made this pronouncement in an interview, despite some flooding that has been (or could be) historical in parts of Brazil’s coffee area. His comments helped to pressure the coffee market last week.
Since last October, I did not want to get caught up in all the hype about “previous” drought and frost damage to the Brazil crop, as I forecasted the northern Brazil drought to break.
I do feel that the potential exists for too much rain in parts of Brazil coffee areas over the next month. However, while some areas will see flooding, other areas in northern Brazil have greatly benefited from the rain.
Overall, it is rare to see raging bull markets in coffee when we do not have a drought anymore. This could be a long-term “bearish” impact on coffee prices deeper into 2022 and 2023.
Coffee Weather - How to Trade This Market
I think as we get deeper into March, we will see a return to wet weather for Brazil’s coffee and sugarcane. However, for the next couple of weeks, the MJO should bring about needed drier weather for coffee.
Now, “if" the period from May-July is wet in Brazil or Colombia, this could compromise Arabica crops further and be bullish again, later.
So, what is my view about the coffee market? Longer term the easing of the northern Brazil drought is potentially bearish heading deeper into 2022 and especially 2023 unless El Niño returns and strengthens. In the short term, expect more volatility and there are historically tight global stocks vs. fluctuations in the Brazil Real, outside markets, etc.
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