Summary

Judy began by addressing the focus of her presentation: coffee. Multiple issues have struck Brazilian Coffee producers, and the combination presents a potentially unprecedented shock for the market. The problems in the market are primarily with Arabica coffee, thus it’s the New York market that’s starting to charge higher, causing a widening in the arbitrage. The Arabica price pulling ahead reflects the fundamentals of the two marketplaces. However, while the supply of Robusta coffee is more plentiful right now, the Robusta market will most likely be dragged upwards too.

The price of coffee in Brazilian Reals is at record levels. Before the drought of October 2020, a massive crop was due, supposedly heralding the imminent arrival of a bear market. Farmers rushed to forward sell tremendous amounts of the current crop at great prices, encouraged by weakness in the Brazilian Real. Drought struck, causing massive crop damage and escalating prices. Now the price in BRL is approaching almost 900, near double from where they sold their contracts. Moreover, on her trips to Brazil, Judy observed that branch growth was poor and that therefore, even with ideal conditions and ideal flowering on those nodes, it may only yield 25%. This is a two-year problem, and therefore, whatever stocks are drawing down also have to cover for the inability of the Brazilian crop to stage a full recovery for next year.  Brazil is by far the largest producer in the world, producing 70 million bags of Arabica and Robusta combined last year. If Brazil has plentiful stocks, there's enough to cover the shortfall.  However, Brazilian domestic use alone is 22 or 23 million and there are only 4 million bags of stocks in Brazil. The estimated shortfall of Brazilian Arabicas for 21/22 is almost the sum of Colombian output and the USDA estimates that Brazilian exports will drop by 10 million next year at a time when the global re-emergence from the pandemic will drive demand back up.  Vietnam should have about 2 million bags more, but of Robusta. Blend switching will accommodate the need to use more Robusta. Technology has really improved tremendously, and roasters are now very adept at masking the taste and utilizing lower quality beans. Consumer stocks are going to have to be used, but stocks in the US are already sitting at multi-year lows. There's almost no certified stock in the United States. Of the certified stock, most of which is sitting in Antwerp, there’s a fair amount of Brazilian semi washed coffee, and Hondurans – which have been sitting in stock for a number of years already – which carries a significant age penalty. In combination with this wake-up from the pandemic, you also have rising freight rates, you have shifting demand allocations. It’s a very dynamic market situation with a lot of upside potential. A recovery in 22/23, yes, but not what the market was expecting.

Cocoa is a sleeper market with potential to wake up. The market has come under huge pressure, and understandably so, because the fundamentals in the cocoa market, when you add it all up are bearish. 165,000 tons surplus for the current season; the crop exceeded expectations - not surprisingly – because Ivorian and Ghanaian actions to achieve just prices for cocoa farmers. While commendable, producers that feel they're getting better prices inevitably increase output. Demand inevitably fell during the pandemic but growth in demand as we emerge from the pandemic will be close to 4 to 4.5%, more than 2% higher than average. That will help draw down supplies and there's potential for some weather issues too, with errant dry weather hitting the Ivory Coast. Cocoa butter may also prove a catalyst with a slowdown in cocoa grinding inevitable. Demand for the butter will very strong because as it becomes cheap which will rapidly reduce supply, and the market will be able to spring from that.

Sugar followed on the heels of soybeans and corn in the previous rally, but sugar is also influenced by ethanol pricing. Sugar production is going to rebound in 21/22, but there's enough potential in this market. The USDA data shows that production is going to be increasing, but it's not going to create a build in stocks, and instead global sugar stocks are going to be declining for the third consecutive year.

Coffee-related companies. The pandemic helped to drive consumer purchases to more at home use. Hospitality, food services and all the coffee that's served in bulk preparation where 15 to 20% is pour down the drain wasn’t ‘consumed’.  Starbucks was quick to innovate during the pandemic, wanting to capture store traffic in any way possible, converting to drive throughs and pickups. As the pandemic subsides the demand for drive-through and pickup will equally subside. Nestle and JM Smucker captured a lot of brew at home retail sales. Three to four times more cups around the world are instant coffee and Nestle really benefited from that and increases in Nespresso sales at the upper ends of the market. Keurig Dr. Pepper are more of an equipment supplier than a coffee supplier. They produce their single serve brewing coffee systems, and these systems equipment sales were strong this past year. But post-pandemic as this demand recedes, they're going to need to push more for having their systems in office coffee supply, or creative vending or canned coffee.

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