Prices Move South for Brazilian Soft Commodities on Oversupply and a Weak Real

Spend Matters welcomes this guest post from Corrina Hutchings, senior market analyst at Mintec.

During the Rio Olympics 2016, we wrote an article on Brazil and the country’s major commodities, predominately sugar and coffee. Differences between the market place back then and in recent months are notable, to say the least.

In 2016, the Brazilian economy had recovered and the Brazilian real (BRL) was strengthening, causing commodity prices to increase. International sugar prices had risen to their highest level since 2012 and coffee prices were also up year-over-year.

Currently, the BRL has been depreciating against the U.S. dollar since May 2017 on the back of political turmoil exacerbated by the recent arrest of Brazil’s ex-president, Luis Inacio Lula da Silva, in May 2018. The currency is unlikely to recover until the new presidential elections take place in October 2018.

The depreciating BRL has driven down prices for Brazilian commodities. Coffee arabica reached its lowest daily price in 4.5 years at the start of July, while sugar prices on the ICE U.S. reached nearly a 10-year low on July 30.

Oversupply has also contributed to the prices decline. The 2017/2018 coffee season was an off-year in the biennial cycle for Brazilian Arabica; however, production was still up 7% from the previous off-year in 2015/2016. Overall coffee production in Brazil is up 16% y-o-y in 2018/19 and total global ending stocks are looking to increase 12%, so prices are not expected to start rising any time soon.

Meanwhile, the 2017/2018 season saw an oversupply of sugar with an increase in domestic production from Brazil, despite the decline in sugarcane production. This is due to a higher content of sugar in the cane. Cane production in Brazil for 2018/2019 is forecast down again, 12% y-o-y. Brazil’s sugar industry is currently trying to mitigate the fall in market prices by shifting some of the sugar production to the ethanol industry. However, reports suggest ethanol has now reached maximum capacity in stores and as demand for ethanol is relatively low, cane processing is likely to move back into the sugar market. Overall, the decline in sugar prices is likely to ease, unlike coffee, due to lower cane production.

Unlike in 2016, commodity prices in Brazil could be mixed. A recovery in the BRL post elections could drive prices up while oversupply continues to push prices down. Meanwhile, the downward pressure on sugar prices is expected to ease, whereas coffee is likely to continue to decline. This year is definitely an exciting year for soft commodities; we will have to wait and watch for the outcome.