Coffee Prices Fall on Projections for Higher Coffee Production

Coffee futures declined Tuesday as the USDA forecasts increased coffee production in Brazil and Vietnam for the 2025/26 season, with Brazil's output projected to rise 0.5% y/y to 65 million bags and Vietnam's expected to climb 6.9% y/y to 31 million bags. Rising ICE coffee inventories, with robusta stocks hitting an 8-month high and arabica reaching a 3-1/4 month high, further pressured prices; however, concerns about adverse weather in Brazil potentially impacting crop size may limit further downside in the near term.

Analysis

Coffee prices experienced a notable decline, with July arabica coffee (KCN25) falling -1.44% and July ICE robusta coffee (RMN25) down -1.41%, primarily driven by an outlook for increased global coffee production. The USDA's Foreign Agriculture Service (FAS) contributed to this sentiment by forecasting a 0.5% year-over-year rise in Brazil's 2025/26 coffee production to 65 million bags and a significant 6.9% year-over-year increase in Vietnam's 2025/26 output to 31 million bags. Bearish pressure was amplified by rising ICE coffee inventories, with robusta stocks reaching an 8-month high of 5,211 lots and arabica inventories climbing to a 3-1/4 month high of 866,951 bags. Further weighing on prices, Safras Mercado reported Brazil's 2024/25 coffee sales were 97% complete by May 13, outpacing last year's 94%. However, the near-term downside may be cushioned by concerns over poor weather in Brazil's Minas Gerais region, which received only 2.5 mm of rain (12% of historical average) in the week ending May 17. Contradictory signals emerge from Brazil's export data, with Cecafe reporting a -28% year-over-year drop in April green coffee exports and a -15.5% fall in Jan-Apr exports. Mixed longer-term supply forecasts also create uncertainty: while the USDA FAS projected a 5.1% rise in Honduras' 2025/26 production and Safras & Mercado, along with Conab, revised their Brazil 2025/26 and 2025 production estimates upwards, Volcafe cut its 2025/26 Brazil arabica forecast significantly due to drought and projects a fifth consecutive global arabica deficit of -8.5 million bags. Demand-side concerns, highlighted by major importers like Starbucks, Hershey, and Mondelez International regarding potential US tariff impacts, add another layer of complexity. Robusta prices find some support from Vietnam's current crop issues, with 2023/24 production down -20% due to drought and significant y/y declines in 2024 and Jan-Apr 2025 exports, though Rabobank anticipates a record Brazilian robusta crop in 2025/26. The USDA's December 2024/25 outlook presented a 4.0% increase in world production but also a drop in ending stocks to a 25-year low.

Key Decisions for Investors

• Investors should acknowledge the current bearish sentiment driven by higher production forecasts and inventory builds, but remain vigilant for potential price support from adverse Brazilian weather and ongoing Vietnamese supply disruptions.
• Monitor closely upcoming Brazilian weather developments, actual harvest yields versus forecasts, and export figures from key producers, as these will be critical in determining near-term price trajectories for both arabica and robusta.
• For equities like SBUX, HSY, and MDLZ, evaluate their sensitivity to potential U.S. tariff implementations on imported coffee and their ability to manage input cost volatility through hedging and pricing strategies.
• Given the conflicting long-term supply outlooks, particularly the projected arabica deficit by Volcafe versus increased production estimates from other agencies, consider a nuanced strategy that differentiates between arabica and robusta, and be prepared for continued price volatility.