MILAN РThe coffee supply chain is a large, complex organism, inhabited by many players who contribute to the final result in the cup: this ecosystem is often influenced by numerous variables that are reflected in the price and the stock market. To navigate this daily moving ocean, we spoke with Albert Scalla. This interview was originally published in Italian on Comunicaff̬ in Italian on Tuesday, December 20th, 2022.
The market expert, with his eye on its fluctuations, adapting to climate changes and new demands, acted as our guide through numbers and phenomena that are often complex to analyse without the help of a professional.
Albert Scalla: can you tell us something about your career path and how you became an expert in commodity trading?
“I have been working in the coffee market for 30 years now. I am a commodities trader and work for StoneX Financial. Together we help players in the supply chain, from producer to roaster, including coffee shops, in the hedge and risk management of coffee, which is one of the most volatile commodities there is, primarily because of the weather. Let’s say, for example, that there is a drought or excessive rainfall in Brazil: this will definitely have repercussions on the stock market.
I am currently vice-president of Stonex, one of the biggest companies in the analysis of all commodities, from oil to oil. For coffee, StoneX is the world’s biggest player in the futures markets. We have 87 offices in 18 countries, 5 of which specialise in coffee. In Brazil we have 17 offices. The three that deal exclusively in coffee are located in Varginha, PatrocÃnio and Campinas.
In thirty years, I have seen arabica prices fluctuate from an all-time low of 43 cents to a high of $3.18. I have witnessed all the problems the supply chain has faced. We have suffered the pandemic, a triple frost, and a series of difficulties, unseen in thirty years of work, that have all manifested themselves in just two years.
Currently, there is a lot of volatility and movement in prices. And an increased likelihood of defaults, mainly from Brazil, Colombia and Central America.”
As Vice President of StoneX, can you tell us about the services your group offers to companies in the sector?
“We share market studies and offer support on risk management through futures contracts, so that roasters and producers can secure and close the price and carry out all operations to reduce the risks associated with price volatility. We also provide some insight into the long term in relation to current events.
Every year we carry out a study on the Brazilian harvest, which accounts for almost 40% of world production. Twice a year we publish a market report – the next one will be in March 2023. In January and February our team of agronomists will travel to explore Brazilian production areas and carry out surveys and assessments, based on which we will then be able to compile our report in the second week of March.
We will make a further trip in June-July. In December we visited Brazil, with a number of roasters and our agronomists, for about 21 days, to observe the post-flowering situation and thus assess the vegetative development of the crops. In January-February – as already mentioned – our agronomists will conduct a survey to assess the potential of the new crop.”
What is your assessment of the current situation in the coffee market? In your opinion, is the ‘backwardation’ situation, which characterises both New York and London, likely to continue for a long time to come? (Now in New York the contango has been re-established, while London remains in a backward market situation, ed.)
“An agricultural market such as the coffee market is normally a carrying charge market (a situation where in the futures market the price difference between delivery months reflects the total costs of interest, insurance and storage, ed.). The future price is higher than the spot price. The carrying charge is paid by the market for storage and all costs for carrying over inventory from one month to the next. When a shock occurs in the market – such as a frost or drought – an inversion or backwardation occurs. The futures market suffers from the strong pressure on the spot market against the risk of immediate defaults and penalties.
Normally, NY and London certified stocks begin to fall amid a drought or a frost. Although certified coffee stocks are a very small percentage of total world stocks, they still cause major movements on futures markets. In 1996/1997, certified stocks fell to practically zero and the market reversed 40 cents from one month to the next.
Returning to the current situation, certified stocks are the ones that currently cost the least. It is therefore normal that we have begun to eat into these stocks and that they have gradually decreased, although there are large inventories available on the market.
I don’t think there is any chance that the level of stocks can increase significantly any time soon. One has to refer to the status of the differentials with the producing countries for FOB prices. If the value is high, nobody will take the coffee to New York to be certified, because you make much more money by selling your coffee to a roaster rather than by submitting it to the exchange to be certified. Right now it is not economically viable to take coffee to certification. It makes more sense to sell certified stocks to roasters.
Backwardation is a phenomenon that generally does not last long. Once production resumes in the various countries, the certified stocks will start to grow and New York will once again become a carrying charge market.
But if stocks plummet again, futures contracts will start to trade again at negative differentials. We also have to take into account production figures for the Brazilian 2023/24 harvest. Everybody expects the largest harvest in history. There is talk of more than 70 million bags.
But between now and the beginning of harvesting operations anything can still happen. At the moment we can say that, in October, once the rains arrived, the flowering has been wonderful. The rainfall has been adequate and perhaps more rain will come in the next few weeks.
The price collapse that we have witnessed over the last 2 ½ months has been caused – precisely – by the high expectations that have been created for the next Brazilian harvest, which will begin in April, for Robustas, and in May for the Arabicas.”
What are the factors that most affect prices and market dynamics, considering: the logistical crisis, international political crises, the effects of climate change, and the persistence of climatic anomalies linked to La Niña phenomenon?
“Mainly the climate. We have been monitoring, since the summer of 2020, the climate situation brought about by the arrival of La Niña, which affected in Brazil the Robusta flowering in August and the Arabica flowering in September. In the former case, this phenomenon brought excessive rainfall, whilst in the Arabica coffee belt it caused a delay in the rainy season onset and drought. The effects on Arabica crops became evident in the first/second quarter of 2021, when prices started to rise. So, the consequences of the drought of 2020 were felt in 2021.
In July, we suffered the consequences of the arrival of cold air masses in Brazil, which caused temperatures to drop, bringing three frosts, one after the other. The second one was the hardest. The total volume of lost harvest was estimated by us at 5 million bags. And this was on top of the negative effects of the aforementioned drought.
The market therefore went up, turned around. As we have already seen, roasters have started to take delivery of certified coffee as it is much cheaper for them. Considering the supply chain situation, with the cost of the container rising ten times its initial value, coffee in certified warehouses in Europe and the US has become by far the cheapest.
Let us go into the specifics of this year, in which there were two very important moments for the future of the bean: firstly, it was necessary to get through the Brazilian winter without another frost, and fortunately this was the case. Secondly, it was imperative that the rainy season come on time.
In September, the rains finally arrived, but the ‘C’ contract initially remained above $2.20. Quotes started to fall just two weeks later, when it became clear that the phenomenon was significant. In fact, the other thing to consider in such cases is that once it starts raining, the rains must last for a long time.
Given the data on rainfall volumes, the market finally collapsed. The markets’ expectations for the upcoming crop currently exceed 65 million bags and this cannot support prices above US$2.”
How do you think the prices of Ice Arabica and Ice Robusta will develop between now and the end of the year?
“We go to Brazil – as already mentioned – precisely to answer this question. After the rains comes the flowering. We then have to monitor the water situation and finally understand how the crop is developing. In the second week of December already we will be able to assess the actual health of the crops. There has been a lot of rain and also hail lately, so we want to understand what the mood of the producers and intermediaries, cooperatives, exporters is and intercept their expectations.
And then of course we want to assess the state of the crops. In January – February, we will go to Brazil again to conduct – as I have already explained – a further field survey. Like us, others will do the same. From this trip we will derive estimates for next year, with accurate numbers.
There is another situation now to consider: the roasters, with the market above US$2.20, were waiting to buy because the price was very high. At the same time, the producers at that level did not want to sell, because they expected the market to rise even further.
After a fall in prices of almost 75 cents in 65 days, producers are now worried. In the case of Colombian producers, the differential plummeted from 82 cents to 48 cents, with losses on both prices and differentials.
The only factor that has saved Colombia is the devaluation of the local currency. If the market starts to rise again, producers will start selling again driven by the worry of having to make a profit. At the end of December we will see how the relationships between the operators will start to change. An Usda report will come out, taking stock of world consumption: the war is a global problem, which is also reflected in consumption, which in Europe remains somewhat weak.
Demand is just now returning to pre-pandemic levels, with a stronger recovery in the US. If Brazil greatly increases its production, imitated by other countries, there will be a production surplus and the market will collapse’.
All major statistical sources (including StoneX) have recently downgraded their estimates of Brazil’s Arabica crop for 2022/23. What, in your case, are the elements and circumstances that have most affected this revision?
“We have revised our estimate for Robusta conillon upwards and the estimate for Arabicas downwards, by about 600,000 bags. As far as conillon production is concerned, we have very high expectations. Some are talking about a figure close to 22.5 million. And we foresee substantial production increases for the Brazilian Robustas over the next two to three years.”
How then is the situation in Colombia, whose production is also declining?
“The La Niña phenomenon, which leads to droughts in Brazil, on the contrary brings abundant rainfall to Colombia. It is an event that manifested itself in a similar way in the years 2007/2009. For Colombia, this translates into long periods of rainfall, which undoubtedly favour flowering, but as we know, the plant also needs the sun for photosynthesis. In 2008/2009, the situation was also aggravated by other agricultural problems, which contributed to Colombia’s production falling by 40-50%.
This year, production will fall from 13.5-14 million bags to less than 11 million, a drop of 2-3 million bags, primarily due to excessive rainfall. But there is a further problem to consider: in Colombia there is a plan for the constant renewal of plantations (around 80,000 hectares per year, ed.), which has fallen behind in recent times due to a lack of resources to invest. These two factors have led to the drop in production.”
What are the prospects in Central America, considering climate problems, the Roya emergency and the consequences of the rural exodus?
“In Central America, for example, Guatemala – compared to other countries like Brazil and Colombia – has not had the advantage of currency devaluation. Production costs have risen throughout the area. The rural exodus and emigration to the US have reduced the availability of labour, making the producers’ profitability problems even more acute. Then there is the Roya problem, which they have been facing for some time. The outlook in Central America is therefore that overall production will fall further.”
Considering the effects of climate change and shrinking arable land, will we have to resign ourselves to paying more for high quality coffee in the future?
“We are observing that everything is becoming more and more expensive everywhere. The level of inflation in Europe, as well as in the rest of the world, will lead us to pay more for everything, not just coffee. Arabica coffee costs $1.60 today – without taking differentials into account – and that is more or less what it cost 20 years ago (also calculating inflation, ed.).
It will be necessary to pay more the grower, who is also the one who usually earns less along the whole chain. Much of the added value is in fact generated at the end of the chain, not at the origin. Looking at the price of green coffee, we realise that the farmer should be paid more. We have to do this if we want to rebalance the supply chain: think about it.”
ALBERT SCALLA Senior Vice President of Trading StoneX Financial, Inc.
Albert Scalla, Senior Vice President of Trading at StoneX, has combined his considerable
knowledge of the Coffee, Cocoa and Palm Oil markets with his experience in implementing risk management strategies in Futures, Options and Structured Products in
the international commodity markets.
Albert joined Hencorp Futures, later acquired by StoneX, 30 years ago, where he has been
an important pillar for the development of Price Risk Management programs for all participants in the Coffee, Cocoa and the Palm Oil markets; from producers to final consumers.
Albert has been invited as a guest speaker to several national and international coffee
conferences to speak on Price Risk Management for coffee participants in both producing
and consuming countries.
Albert received a bachelor’s degree in Business Administration with a specialty in
Finance from Florida International University. Albert is past President of the Pacific
Coast Coffee Association (PCCA).
