On Aug 25th, we visited a few #coffee producing areas from the Cerrado (MG) region in Brazil and had the opportunity to witness a portion of the 24/25 crop flowering. Moreover, we talked to producers and agronomists about their view of the 23/24 harvest and sales. In sum, the 23/24 harvest is virtually finished there, and the overall assessment was of a decent output this year, while we saw evidence of good potential for the 24/25 crop.
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The trip covered ~600 hectares of planted area, and is therefore a very small sample from Brazil, but it ultimately supports what we’ve been hearing about crop potential and the selling progress of the new crop. In this article, we will present the main takeaways from this visit and analyze our key discoveries.
Overview
Cerrado is a meaningful #Arabica (Washed and Naturals) producing region, responsible for approximately 10% of Brazil's coffee output (as per Conab’s data). As such, it produces a volume of ~6m bags, which compares to Honduras in terms of crop size. The visit took place by the end of the harvest season, while all farms had finished harvesting activities by the time of the visit.
We were able to see flowering in some areas, while floral buds were ready to blossom in others. In general, we noticed healthy plants, as no widespread problems have impacted the region, given that weather conditions have been decent. It’s early to assess the 24/25 crop size, but good potential was observed.
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Some farmers are opting to irrigate their crops to induce and anticipate the flowering, while others are opting to let the rain do the work. In both cases, they seem confident that regular rain will come in September and October, and it's crucial that it comes, so that the blooms can fix accordingly, and the 24/25 crop potential is not undermined.
Regarding the 23/24 crop, the views from different farmers and agronomists were congruent in reporting a decent-sized crop and concerns about prices being low. Despite the shared dissatisfaction with prices, decision about selling varies, with some opting to hold the entire crop, while others are selling despite the reduced margins.
Plants & Flowering
No widespread problems were noticed upon analyzing the plants and talking to farmers and agronomists in this area. In general, 24/25 yield potential seems promising, judging by flowering (and the flower buds) on the trees coupled with a lack of issues and the satisfactory (albeit early) precipitation forecasts. Ultimately, farmers report that the 23/24 crop was a decent improvement against 22/23, and we noticed that, in general, they expect a crop of equal or larger size for 24/25 in their farms.
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In the areas that haven’t experienced flowering yet, the blooms are getting ready to flower as could be expected at this time, while producers let the rain do the job. Those who opt to induce flowering are doing this so that next year they can start harvesting on time and finish works on time. With this, they avoid the risk of getting into the rainfall season start with unharvested beans on the trees.
However, it’s important to note that even though irrigation can support the plants if rainfall underperforms, it only helps to a point. Therefore, it is essential that rain and temperatures are near normal levels through Sep-Oct. To date, the precipitation forecasts suggest that they should come.
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Crop Selling & Farmer Sentiment
The consensus from this trip matches what we’ve been hearing from reports: producers aren’t happy with prices, but some are selling their volumes anyway, especially those who deal washed coffees, whereas the ones dealing Naturals we spoke to are holding back sales (one farm is even holding back the entire crop).
Their dissatisfaction with prices comes from their cost of production, which hovers around ~700BRL per bag. Since they consider 300BRL/bag to be a good profit, current prices around ~800BRL/bag can only make for a third to what they find to be a satisfactory margin. Those who hold back the crop tend to think that prices will be higher by Dec-Jan.
Their expectation is that by Dec-Jan, most selling will be done and there shouldn't be much coffee left in warehouses in Brazil, so they are expecting that this will give an incentive for prices to increase from the current 800BRL levels up to 1000BRL. This 25% increase implies that the futures market would need to trade above the 180c mark to make them happy.
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However, to hold the coffee, they need to take on costs of warehousing and insurance. Although they can do this for quite some time, those with less capital can’t hold indefinitely, due to the costs, and so if prices contradict their thesis, they’ll have to sell at some point. Altogether, it’s likely that producers will capitalize on eventual price rallies to sell their crops, and this will have a bearish “ceiling effect” on the market.
Outlook
For the moment, it’s not looking like the 24/25 crop blooming will face a major hazard, as precipitation looks good on the Sep and Oct maps. However, the 2-week forecast looks somewhat below-optimal, and so we acknowledge that the risk exists from rains coming in heavy and disappearing soon after.
In general, plants that are more stressed (those that received less water) may flower with less stimulus than those that received more water, and if they flower and rains don’t follow up, it can be harmful. According to agronomists, 20mm of rain is required to induce flowering (in general), while the 1-week forecast shows a max of 19mm. In sum, this scenario doesn’t look problematic, although it can change rapidly.
Conclusions
The small evidence collected supports the general view of a good 23/24 crop and the optimistic prospects for 24/25. The area surveyed is not representative of Brazil in its entirety, but we also didn’t see evidence of problems. Moving forward, if rain follows through as indicated by the monthly maps, the 24/25 crop will move one step closer to being a decent-sized crop.
This would support our view of looser fundamentals, while we currently work with an estimated surplus for 23/24. However, a lot will pivot on the rainfall season kickoff from here onwards, and so if precipitation is insufficient (or the market interprets that it will be), coffee bulls will revive.
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