Minimum prices up, trading down

In a rather bizarre twist, the Coffee & Tea Authority decided this week to increase considerably the Minimum Registration Prices. Why would you do that in a declining terminal market? Minimum registration prices have been irrelevant in the past few months as bids, offers and traded levels far exceeded these. However with the recent decline in terminal levels, the usual brisk trading activity for this time of the year has greatly reduced, asking prices have been above levels that buyers are prepared to pay. Naturally sales registration in March were low, so why increase the minimum price that you can register a sale? Furthermore, shippers´ warehouses are full of parchment that remains mostly unsold and increasing the price that coffee can trade is hardly going to improve trading…

Below the minimum registration prices and NY close for day before publishing the weekly minimum registration price:

A severe consequence of draught and war is famine and this seriously affecting the population in the North of country, the BBC report: https://www.bbc.com/news/world-africa-60861900

Birr 50.99 USD = 1

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Trading at a standstill

Coffee is not changing hands, stakeholders with coffee stocks, whether farmers, middlemen or exporters, are sitting on them! Why is this happening? In 2 words: Finance and Price.

Shippers that own expensive Washed parchment that has tied up their cash, cannot find an overseas buyer willing to pay 100 over plus. In an environment of high prices, restricted access to finance and stocks that are not moving, shippers are finding themselves paralysed. There will be a quantity of washed Grade 2 coffee sold above 350 c/lb FOB and this coffee is getting shipped. However, the price paid to farmer for cherries is higher than what is currently achievable in the FOB market, as a consequence trading has ceased. It is clear to us that overseas buyers of Washed qualities are looking to buy, however not ready to pay the shippers asking prices.

Shippers that are short Naturals (Grade 4 and 5) at below 200 c/lb FOB cannot cover from local middlemen without incurring substantial losses. This last point is supported by current asking prices for Grade 5 prices between 215 and 220 FOB Djibouti LC (Grade 4 at 240 c/lb). In the lower grade space (Grade 4 and 5) there are delays in shipments as exporters struggle to cover sales registered in February (at what now look like very good prices) because middlemen had got used to ever increasing coffee prices. Agrabes and farmers are in for big shocks, the market will not pay the expected prices, and as much as the Birr is expected to devalue vs the USD, the decline will most likely be slow and steady. For now stock holders of Naturals will wait to sell, time is on their side, after all we are in March and very little of this crop has been shipped so far.

There are stocks at processing mills in Addis but shipments in March and April will most likely be lower than we could otherwise have expected were it not for the scenario outlined in the previous paragraphs.

Birr 50.95 = USD 1

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Inflation rate stabilising

Trading is slow, stock holders looking for prices similar to what they saw a month ago, however the relentless decline in the terminal markets dictate much lower bids. Shippers are starting to get worried that the gap between asking price and bid price is growing by the week. Undoubtably, the sharp and continuous lower market, came as a shock to all the stakeholders in Ethiopia that got used to selling at ever increasing prices over the past more than a year. Hopefully the sales done in February (at the start to the trading season) will keep exporters busy for the coming months.

Meanwhile Inflation seems to have settled in a range between 33 and 35%. Indeed, the monthly annual rate of inflation for the past 6 months (Sep 21 to Feb 22) has fluctuate within this narrow range. During the previous 6 months (Mar 21 to Sep 21) inflation had risen from 20% to 35%!

Forex 50.90 = USD 1

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Better Crop + Better Quality + Better Prices = Record Exports

That’s right, the 12 month period March 21 to Feb 22 accumulated 5.18 Million bags in Exports! Exports to Saudi Arabia and Europe in February flushed out the remaining Grade 5s from the 20/21 crop as Brazil logistical woes and high prices were no match for Ethiopia proximity (in the case of Saudi) and very competitive prices. Exports for the period 21/22 were higher by 1.49 Million bags vs 20/21, that equates to a 40% increase year-on-year.

With the world intensely focused on the war in Ukraine, there is little coverage from media outlets on the Ethiopian internal conflict. What we can report is that the internal conflict is not impacting the coffee supply chain. While security concerns remain in some coffee growing areas, which are delaying and hampering certification inspections, the flow of coffee along the supply chain is progressing practically unaffected. Parchment and Naturals are arriving in Addis and warehouses there are full, likewise processed coffee is finding containers and transportation from Addis to Djibouti.

Export sales this week remained sporadic and spotty. Shippers continue to focus on fulfilling previously concluded contracts established when the terminal market was at much higher levels. Offered prices, which are not that easy to come by, are at very expensive levels limiting business activity. In the interior, traded prices between middlemen and shippers remain at Birr 4,000 ( 230 usc/lb FOB equivalent) for Natural Grade 5 coffees. These levels are not sustainable while future level are in the mid-230’s. Much more activity/interest in spot Europe market.

On forex markets the Birr actually appreciated vs the Euro, as the single currency took a beating vs the greenback.

Birr 50.84 = USD 1

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With the World in turmoil, Ethiopia is quiet

Arabica Coffee futures have collapsed from the the highs reached last month, the drop has been relentless and precipitous leaving us all trying to catch up! Trading in Ethiopia coffee has all but come to a standstill as stocks of parchment pile up at dry mills in Addis Ababa. The problem is that export sales of Washed coffees are well below expectations so coffee is not getting milled and shipped. Internal prices for cherries and parchment have been way above export prices and while the terminal market was rallying this mitigated (in part) the problem. However the terminal market is looking very shaky and with low export sales registered it is likely that Addis Ababa warehouses will remain full of unprocessed coffee for some time yet… if this situation is not resolved soon, processing of naturals and subsequent shipping could be affected, warehouse capacity is limited and if full of parchment the flow of naturals along the supply chain could be restricted, resulting in delayed shipments.

There is still no news of the the fighting in the North of the country, it has not stopped and the problem has not gone away, it seems to be a case of “out of sight, out of mind”!

Birr 50.80 = USD 1

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Turbines start producing electricity

Africa’s largest hydroelectric plant started producing electricity this week. Under construction since 2011 the dam is expected to double the Ethiopia’s electricity generation capacity. It’s existence has been hugely controversial, Egypt and Sudan have continuously expressed concerns as they are very dependent on the Nile for drinking and irrigation water. Power generated by the Grand Ethiopian Renaissance Dam (Gerd) is expected to be exported to neighbouring countries and therefore become an important forex earner for the Government and potentially allow for a softening of the current forex restrictions which are crippling exporters.

On the coffee front this week as been a much quieter week than the last two, due primarily to the Terminal market’s retraction following the events unfolding in Ukraine; additionally shippers sold a lot during the first 3 weeks of February and are now focused on covering commitments rather than increasing sales.

Birr 50.77 = USD 1

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Another busy week

Increased availability of Naturals and a terminal market above 250 usc/lb again propelled business to get concluded this week. There seems to be reduced interest in Washed coffees as prices are deemed rather high. Naturals at significant discounts to Brazil prices continue to attract attention and since trading within Ethiopia is now allowed, activity intensified. We believe that there have been very significant export registrations this week. Coffee is starting to arrive in Addis for milling in a more meaningful quantity and we expect to see many samples in the coming weeks.

There are increased concerns surrounding the quality of Washed coffee, particularly from the South (Sidamo, Guji and Yirgacheffe), additionally shippers are complaining that they are struggling to sell these qualities to overseas buyers due to high asking prices, which are a result of unchecked cherry prices paid during the harvest.

According to the Centre for Global Development, China’s two largest overseas development banks invested $23 billion in infrastructure projects on the continent between 2007 and 2020. This is $8 billion higher than the combined contributions of the other top eight lenders, which include the World Bank, African Development Bank, and US and European development institutions. One wonders when time to payback comes, what this will look like!

News on the fighting raging in the North of the country between Tigray Rebels and the National Army was been nearly zero. The only news on the internal conflict this week comes from the West of the country where Oromo Liberation Army (OLA) rebels attacked trucks carrying fuel supplies for a Sugar refinery in Horro Guduru.

Birr 50.62 = USD 1

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5 Million bags?

February export figures again did not disappoint, over 13 K MT brings the 11 month period March 21 to Jan 22 to over 290 K MT and keeps us on a path to reach 5 M bags by the end of Feb 22! Admittedly 13K MT is the lowest export figure for many months, but this was expected given the strength in shipments during previous months, however a mere 10 K MT in Feb are needed to hit the 300 MT in a year milestone.

Business in Ethiopia this week has been a little more buoyant aided by the resurgent terminal market hitting new highs. Shippers are also seeing improved internal flow and eager to get going in Naturals since the volumes of Washed coffees available have been rather disappointing this season.

Forex Birr 50.26 = USD 1

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It is quiet on all fronts!

It has been a quiet week on the coffee trading front in Ethiopia. Shippers are reluctant to offer, Naturals are currently not offered by agrabes even though the government announced the start of trading in Naturals this week. Washed coffees continue to be offered at high differentials even considering the recent strength in the terminal market, having bounced back from the 230 c/lb level. Quality of the first Washed coffees that we have seen is mixed. Quality of Limu 2 samples that have been presented with is good and promising, however Sidamo 2 samples seen have been lower than expected. It is possible (not confirmed yet) that shippers will try to overcome a shortfall in production in the South by mixing in washed coffees from other regions (quality will suffer if this happens). As we move on and more samples become available we shall be able to better assess quality coming from Sidamo and Yirgacheffe, we have not seen enough samples to pass judgement.

Addis Ababa has been in the grip of very tight security arrangements due to a Africa Union summit this weekend with many African heads of state in town. News of the internal conflict has not been forthcoming this week, so the assumption is that fighting is subdued.

Shipments for January are typically low and this January is likely to a typical one. We are expecting official export figures in the coming days.

Birr 49.97 = USD 1

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Let’s discuss inflation

After a delay in publishing, official inflation data shows that December inflation climbed again to 35.1% (Nov 21 annualised rate was 33%). The statistics office blamed seasonal festivities for the recent spike in prices but the roots go deeper. Firstly, price increases in recent months have not been confined to Ethiopia, all economies around the globe are experiencing inflationary pressures. And then of course there is the war which has had an impact on the economy, including slowing down growth. The economy is not in a good place, Inflation has accelerated from 20% to 35%, the growth in the inflation rate was 75% in 2021.

The Birr has devalued by a more “usual” 20% during 2021. Normally we expect currency devaluation and inflation to track each other more closely, but 2021 due to the upheaval of war, a spanner was thrown in the works, resulting in runaway inflationary pressures. The black market forex rate is very different to official rate, where hard currency is traded at around 1/3 more than the official rate.

Not much news lately from the front, it would seem that there is a hiatus at present, with the TPLF back in Tigray and the Ethiopian Army happy to sit in Amhara region. Maybe this is an opportunity for looking at resolving the conflict in a more peaceful manner? Let’s hope so.

Meanwhile the harvest in winding down. The reduce production of Washed coffees in the South that translated to high differentials is also likely to have a negative effect on the quality of exported Sidamo 2 and Yirgacheffe 2, as more unscrupulous shippers mix in lower grades of washed coffees (Limu 2, Tepi 2, etc.) to bulk up their genuine Sidamo/Yirgacheffe beans. Buyers will need to be vigilant when cupping!

Birr 49.73 = USD 1

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