Brazil is a major supplier of essential goods like coffee and orange juice to the United States. In 2023, it supplied about 35% of America’s unroasted coffee imports, mainly due to its large production of Arabica beans. However, factors like droughts and less fertilizer use have hurt Brazilian coffee production, leading to lower supply and rising prices in the U.S. Brazil is also significant for orange juice exports. From October 2023 to January 2024, 81% of U.S. orange juice imports came from Brazil, compared to 76% the year before. This increase happened because Florida faced reduced production due to citrus greening disease and extreme weather, making the U.S. more reliant on Brazil’s supply. The U.S. reliance on Brazilian coffee and orange juice highlights how trade policies and environmental issues can affect the availability and prices of everyday goods. Recent events show a notable drop in supply from Brazil, impacting more than just consumer products. Severe droughts have reduced Arabica bean yields and limited export capacity. Plus, the decline in fertilizer use indicates significant stress on production methods. If this continues, it may keep putting pressure on output for the rest of the year. It’s important to recognize how agricultural inputs connect to export volumes, especially when unfavorable weather patterns persist for these crops. Brazil has become a crucial backup for coffee and orange juice in North America, compensating for production challenges in other regions. Pest outbreaks in Florida and extreme weather have prevented U.S. producers from meeting their usual output. The nearly five-point increase in Brazil’s share of U.S. orange juice imports in just a year underscores this. This situation indicates that weather-related instability in Brazil, along with lower fertilizer use, could create erratic price changes. Low stockpiles and tight margins at the source increase the possibility of volatility, especially if short-term issues like droughts or strikes disrupt logistics or harvesting. We expect significant price fluctuations in the next quarter, particularly if export terminals face delays or picking seasons fall short of expectations. Traders should prepare for highly sensitive price movements, likely favoring increases. A missed shipping opportunity or a change in crop yield predictions could lead to price jumps for orange juice and Arabica coffee futures. If current discounts do not adjust to new supply trends, the differences between origin-based contracts and U.S. benchmarks might widen. Additionally, the dollar’s value compared to the Brazilian real could impact prices. If the real appreciates, import costs will increase, supporting higher prices for ICE or NYBOT contracts. On the other hand, a weaker real could temporarily ease imported inflation but may not fully reverse rising costs due to supply tightness. A key point to watch is how forward contracts may start to diverge from historical trends. For instance, if inventories remain low by mid-year, the market might factor in scarcity for later contracts. Those managing derivative positions should think about how long-term contracts may reflect risk premiums earlier than expected. Instead of keeping directional exposure, rotating short-dated contracts into layered options or staggered hedge positions could be more effective. We are also looking for signs of secondary effects as processors and distributors try to recover increasing costs. If price increases for retail beverages or cafe demand happen more quickly than anticipated, futures spikes could become self-reinforcing. This concern is based on recent supply chain data that indicates reduced buffer stocks at major U.S. ports. Overall, the situation is tight and reacts strongly to challenges in Brazil and consumption trends abroad. With skewed production numbers already seen in the first half of the year, further declines could impact the prices of future contracts. The timing of rainfall in southern Brazil will be crucial, and any ongoing issues with fertilizer access could limit the effects of seemingly improved forecasts. Tracking export license activities, vessel loading schedules, and global fertilizer trade flows may provide early warnings of further availability constraints. In our opinion, being responsive in positioning rather than relying solely on predictions could provide the best advantage in this stressed supply chain.

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