Frost in Brazil — Making Sense of the Coffee Market

On Tuesday, July 20th a severe frost hit Brazil, primarily in the growing regions of Sul de Minas and Parana. Whereas Parana is a small producer, Sul de Minas is a major coffee-growing region.

The first frost - which hit the same regions - struck in late June; it was significant but only caused minor damage. The C-market price increased roughly 8 cents in two days with a subsequent sell off when it was discovered that the scope was limited to a few hundred thousand bags. The frost that struck on July 20th was severe in scope.

After the second frost, the C-market has rose roughly 50 cents in just six days. However, the market can be difficult to understand. Mixed in with the rise might be fears of a third frost which is due to hit Sul de Minas and Parana on July 29 and/or 30th. We have not seen three frost conditions before, so the effects here are not totally known.

While it is still early to have a firm grasp on the extent of the damage, most experts are estimating that this will affect millions of bags. For roasters it generally means higher prices on most of the green coffee they buy. After flowering happens in Brazil in a couple of months, we’ll have a better understanding of the damage, but for now, we are all living through the damage and volatility.

Genuine Origin asked Mauricio Jimenez (MJ), General Manager at Genuine Origin, and Ryan Delany (RD), Chief Analyst at Coffee Trading Academy to help us understand what is going on in the market, how producers are being affected and how roasters should source green coffee in this period of volatility.

The pictures from the field teams in Brazil look terrible. Are the coffee plants dead?

RD: It is likely that some of the younger trees have died, but in general frost does not kill a coffee plant. Frost attacks the areas of the plant with the thinnest membrane so it is primarily the leaves and what’s called the “new growth“.

These are both relevant, let’s look at the new growth first. The new growth is the green shoot that comes out of the end of the branch during the harvest and this is where the buds and flowers appear that will become the following year‘s harvest. So frost damage does not impact the current harvest but it reduces the next year‘s harvest.

One of the challenges in forecasting the damage is that there are still many variables between now and next year‘s harvest. For example the weather has been quite dry the last few months (this actually facilitates frost because it gets colder in dry weather), but if we have good rains and weather over the next couple of months the plant will recover a lot of the lost volume.

However the farmers may decide that the damage is so severe that rather than trying to encourage the tree to grow a small crop this year they may just prune so that they have a better crop in 23/24.

Other factors include farmer care, more frost damage and the price of coffee.

The other thing we have to look at is the damage to the leaves. The 2nd frost burned many leaves off. If the leaves are sufficiently burned, then they fall off. This makes the trees more vulnerable.

The leaves form an insulation barrier for the core of the plant. Now that those leaves are lost, the tree is “naked” so to speak and even more vulnerable to the next frost predicted this week. We haven’t had 3 frosts in a row strike coffee before so the effects here are not totally known. The fear is that since the trees have already been burned, the frost may penetrate deeper into the plant and actually kill the tree.

MJ: Although the photos are abysmal there are some reasons to be hopeful. Coffee trees are hardy. Younger plants tend to be more vulnerable to cold than older plants because they have fewer leaves. Frost makes the leaves turn black and fall off.

Because a plant without leaves will not yield, producers will prune to encourage the growth of new branches and leaves. Pruning is a viable option, but it could take years for a pruned coffee plant to produce at its full potential.

Why is the frost having such a strong impact on the C market?

RD: Brazil is the world’s largest producer of coffee and the largest producer of Arabica by far. Every year the coffee consuming world relies on Brazil to produce the bulk of the coffee. If that production is meaningfully compromised, the market must reprice to reflect the shortage. Think of how the price of hand sanitizer skyrocketed when there were shortages during Covid; the same thing happens to coffee. When Brazil sneezes, the coffee world catches a cold.

Why is this affecting the price of coffees that are already listed as in stock on GO’s site?

MJ: We raised prices on 2021 coffees to protect ourselves against these price shocks and the impact it is having on sourcing. We needed to raise costs now in order to mitigate the effects in the future. Our prices are based on current market rates and the cost of replacing existing stocks.

What are the Genuine Origin field teams witnessing on the ground?

MJ: People often think of Brazil as a big coffee grower. They think of industrial scale production. What we forget is that behind all of that coffee and those farms are families. Many farmers have sold a good percentage of their crop for the following year.

How long do you think higher prices will last? Will it go up, down, stay put?

MJ: No one has a crystal ball. In my experience, coffee tends to exacerbate market swings. A producer needs to see high pricing for a lengthy period of time in order to produce/plant more. Coffee isn’t something you plant and then forget about. You’re developing a plant that will/should for the next 20 years.

RD: This is a changing picture. What we know for sure is that we will see volatility. Most analysts — myself included — were anticipating higher prices for the second half of this year even before the frosts. Now that the frosts have materialized, it seems likely that we are in for a pretty intense bull market.

A lot will depend on how this frost plays out this week. If it is as bad as the last frost, the market will be in panic mode. If not, then the market may decide that we are overvalued here and that prices should be lower.

Prices may also be affected by currency fluctuations, ongoing assessments of the frost damage and the weather during the flowering in Brazil over the next few months.

Should Roasters put off purchasing coffee?

RD: It depends on the needs of the roaster. If the roaster is able, they should have a price risk management plan and follow it. I have some introductory videos on hedging on coffeetradingacademy.com and also a training course available.

Beyond that, the roaster should stay informed on what’s happening in the market. They can sign up for a free or low cost subscription on my website to get my views, and they should be in communication with their suppliers.

MJ: We’re in the middle of two cold fronts, so now isn’t the greatest time to make long-term plans. Most Roasters have never seen this kind of market volatility. However, Roasters have to purchase coffee — it’s what they do.

I advise roasters to examine their operations and think critically before making any rash decisions. Definitely don’t become desperate. You can always use GO and order what you need — in 65lb boxes — when you need it.

Is there going to be a correction, or are we in for further shocks?

MJ: I’m not sure if we’ll see a correction anytime soon, but the market will always find a way to return to equilibrium. We will probably witness massive volatility if the next frost has the same power.

RD: Yes, there will be many corrections, especially if the price continues to rally hard. One thing to note is that the market tends to accentuate position vulnerabilities. So if everyone gets very long, the market tends to correct lower. If everyone is very short, the market tends to rally.

How can roasters safeguard themselves from future jolts?

RD: Having a hedging plan and staying informed are key here. There is a Chinese proverb that the best time to plant a fruit tree is 10 years ago, the 2nd best time is now.

MJ: The key, in my opinion, is to understand your business. The more your flexibility, the more pivoting and adapting you can do to minimize the impact on your organization.

Can you, for example, blend several origins in order to reduce your reliance on a single coffee? Can you rotate your single origin menu so that clients always get excellent value?

Why is the price of coffee from different origins affected by the frost in Brazil and what impact will this have on farmers in Brazil and other countries?

RD: For those farmers in Brazil affected by the Frost, it is of course a disaster. Some may be forced to default on commitments and suffer economic damage. For those farmers not directly affected by frost, they will benefit from higher prices.

MJ: Farmers in Brazil will be hurt by this. Many producers sell ahead, ie, — they sold before the frost at a lower price and now have to fulfill those commitments when they don’t have as much coffee to sell.

Producers in other areas of the globe are experiencing record prices, but many will miss out on this immediate spike in prices since they don’t have coffee to sell today. A coffee producer in Guatemala or Honduras only has coffee to sell during the harvest, and prices must remain high until at least December 2021 for them to benefit from this market increase.

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