A strengthening Brazilian Real together with weather concerns for both Brazil and Vietnam as well as the news that conillon prices are now trading at a premium to low quality arabicas in the internal Brazilian market, all combined to push coffee prices a lot higher this week. Arabica coffee prices gained 9.35 cents/lb. Robusta coffee prices although originally dragged upwards by the rise in New York, did not rise by anywhere near the same extent and only made $34/ton (1.5 cents/lb) over the week. In the absence of local market distortions, roadside parchment coffee prices in Papua New Guinea should be 90 to 95 toea/kg higher in the week to come.

The upward surge is something of a surprise, but some analysts believe that the shortage of robusta will switch demand to arabica, hence the upward move. Whilst there is an element of truth in this line of reasoning, much will depend on what happens to the overall supply /demand balance. Exports of robusta coffee from Brazil during September were down sharply, nevertheless exports of robusta over the first 9 months of the year remain significantly higher than they were for the same period last year. Rains have picked up in many parts of Brazil’s coffee producing regions and local weather forecasters suggest that they should continue into next week. However, heavy rain in Vietnam over the last couple of weeks is expected to delay the maturation of the crop, and thus have a serious impact on the upcoming peak harvest season next month. Robusta prices fell earlier in the week in reaction to reports of higher exports from Vietnam, but quickly rebounded, when traders noted that the spot month contract (November) had climbed higher than the other active contracts, which is sure signal that the major players have serious short-term supply concerns. African coffee trader, ETG, has revised their global supply/demand estimates for 2016/17. The robusta supply deficit was revised to 5.8 million bags from their previous estimate of 4.2 million bags while the arabica market is expected to see a surplus of 4.1 million bags. Globally, the 2016/17 coffee year is now forecast for a supply deficit of 1.7 million bags. According to the National Coffee Board of Peru, beneficial weather conditions, which triggered a widespread flowering, will boost production by 25% to 5.75 million bags next year.
Activity in the physical market was reported as being relatively normal for this time of the year with attention, once again centring on Brazilian and African arabicas as well as robustas from Indonesia. Despite this week’s price hike, price differentials remain virtually unmoved, but the situation is mixed. Brazilian 3/ 4’s are unchanged at minus 24; Honduras HG’s are slightly higher at plus 1; the quotes for Kenya FAQ’s have narrowed slightly to plus 90/98; Colombian UGQ’s are steady at plus 9; as are PNG Y1’s at minus 10. 
Despite this week’s climb, the outlook remains quite precarious. Over the next few weeks a number of forecasts will begin to emerge on the size of next year’s crop in Brazil. Plentiful rain means that the flowers that have developed should set, but the big question is whether the earlier dry weather has inhibited bud development and hence the size of next year’s crop. Clearly many in the market believe that the supply/demand situation will remain tight next year but at the moment that appears to be based on supposition. The upward momentum in the arabica market seems to be well entrenched and further rises cannot be ruled out but profit taking this week may well limit any rise this week and may undermine confidence.