Expert Call: Coffee Outlook in 2015 and Beyond

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:

 

Call Replay

 

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:

  1. Late Winter Frost: Brazilian winter (November-December) mild frost lowered crop quality
  2. Severe Drought: Drought and lack of moisture in tree root system from January-March during the vegetative period
  3. 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.

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst

 


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