On Thursday, August 21st, the Hedgeye Macro Team hosted a call with Judith Ganes-Chase, founder and president of J. Ganes Consulting, an independent agricultural softs commodities research and consultancy firm. Judy worked on the sell-side for 20 years before founding J. Ganes Consulting in 2001. A replay link to the call is included below with a brief summary:
Judy acknowledged that Brazil has a cyclical pattern of coffee production (one year up, one year down). However the scale of Brazil’s shortfall in the coming years will be unprecedented: She emphasized that this is the first time we are looking at a two-year production deficit.
Judy proceeded to outline three unusual weather scenarios that occurred earlier this year:
- Late Winter Frost: Brazilian winter (November-December) mild frost lowered crop quality
- Severe Drought: Drought and lack of moisture in tree root system from January-March during the vegetative period
- Heavy Rainfall: Late timing of heavy rainfall knocked flowers off trees, reducing the available volume for harvest
- In her prediction prices could easily move much higher: Brazil will not produce enough volume in 2015-2016 to meet the global market demand for Arabica coffee.
- Consensus expected 53-64 million bags of Arabica to be produced, but less than 46 million bags will come out of Brazil this year.
- Dire outlook into next year: Next year aggregate demand is expected to be around 34 million bags. However due to a current stock deficit and severe crop damage, Brazil’s production yield will be just 27 million bags in 2015.
- Nobody to pick-up the slack: Not enough capacity from other countries to cover the expected crop shortage of Arabica coffee in Brazil.
- How High Can Prices Go?: $2.75 to above $4.00/lb. There will likely be a spike in prices for Arabica, and a higher basis for other grades of coffee. We can expect some read-through after the assessment of the third or fourth bloom in the coming weeks.
*h/t to The Macro Team's Ben Ryan for his work on this topic.
Feel free to reach out with additional questions.