Coffee Prices Rebound on Strength in the Brazilian Real

Coffee prices reversed earlier losses, buoyed by a strengthening Brazilian real which reached an 8-month high against the dollar, discouraging Brazilian coffee producers from exporting. Initial price declines followed reports of above-average rainfall in Brazil's Minas Gerais, easing drought concerns, while harvest progress in Brazil is also limiting price gains; however, overall pressure on coffee prices persists due to forecasts of increased coffee production in Brazil and Vietnam, coupled with rising ICE coffee inventories, despite some concerns about reduced robusta output in Vietnam.

Analysis

Coffee prices (July arabica KCN25 up +0.89%, July ICE robusta RMN25 up +1.58%) experienced a rebound, primarily driven by the Brazilian real strengthening to an 8-month high against the US dollar, which typically discourages export selling from Brazil. This movement reversed earlier losses attributed to above-normal rainfall in Brazil's Minas Gerais coffee-growing region, which received 23.4 mm of rain (207% of the historical average) for the week ended June 7, easing dryness concerns. However, upside potential in coffee prices is currently limited by harvest pressures in Brazil, with Safras & Mercado reporting the 2025/26 coffee harvest as 28% complete by June 4, slightly ahead of the 27% five-year average. Over the preceding five weeks, coffee prices faced downward pressure, with arabica reaching a 2-month low and robusta a 7-1/4 month low, largely due to forecasts of increased global coffee production and ample supplies. Specifically, the USDA’s Foreign Agricultural Service (FAS) projects Brazil’s 2025/26 coffee production to increase by 0.5% year-over-year (y/y) to 65 million bags and Vietnam’s 2025/26 output to rise by 6.9% y/y to 31 million bags. This bearish outlook is compounded by rising ICE coffee inventories; robusta inventories climbed to an 8-3/4 month high of 5,438 lots on May 30, and arabica inventories reached a 4-1/4 month high of 892,468 bags on May 27. Further supply expectations include a +5.1% y/y increase in Honduras's 2025/26 production to 5.8 million bags. Brazilian production estimates have also been revised upwards by Safras & Mercado (to 65.51 million bags for 2025/26) and Conab (to 55.7 million bags for 2025). Demand-side concerns add to the pressure, with major importers such as Starbucks, Hershey, and Mondelez International indicating that potential US tariffs on imports could elevate prices and negatively impact sales volumes. Conversely, some bullish factors persist, including a -28% y/y decrease in Brazil’s April green coffee exports (Cecafe) and a significant -20% drop in Vietnam’s 2023/24 robusta production due to drought, resulting in a -17.1% y/y fall in 2024 exports from Vietnam. While Vietnam’s Jan-May 2025 coffee exports are down -1.8% y/y and the Vietnam Coffee and Cocoa Association cut its 2024/25 production estimate, the USDA FAS projects a +7% y/y rebound for Vietnam’s 2025/26 crop. The USDA's December biannual report presented a mixed picture, forecasting a +4.0% y/y rise in 2024/25 world coffee production but also a -6.6% decline in ending stocks to a 25-year low. Reinforcing supply tightness concerns, Volcafe reduced its 2025/26 Brazil arabica production estimate and projected a global arabica deficit of -8.5 million bags for 2025/26, marking the fifth consecutive year of deficits.

Key Decisions for Investors

• Investors should closely monitor fluctuations in the Brazilian real and evolving weather patterns in key coffee-growing regions like Brazil and Vietnam, as these factors are significant short-term drivers of price volatility.
• Given the conflicting signals from current harvest progress and inventory builds versus projections of tightening global ending stocks and persistent arabica deficits, a cautious approach is warranted when establishing or adjusting positions in coffee futures.
• For equities with significant coffee input costs, such as Starbucks (SBUX), Hershey (HSY), and Mondelez (MDLZ), it is crucial to assess the potential impact of volatile coffee prices and any implementation of US tariffs on their profit margins and sales volumes.