Coffee Prices Settle Lower on Tariff Woes

Coffee prices retreated amid concerns over a potential 50% US tariff on Brazilian exports and bearish USDA forecasts projecting record global production for 2025/26, particularly for robusta, where inventories are rising and fund short positions are at a two-year high. While the accelerated Brazilian harvest adds supply pressure, arabica prices are underpinned by declining inventories and a widening projected deficit for 2025/26, alongside adverse weather in Brazil and reduced recent exports from key producers, creating a nuanced market outlook.

Analysis

Coffee futures have retreated, with September arabica (KCU25) falling 1.77% and robusta (RMU25) down 0.53%, primarily driven by concerns over a potential 50% US tariff on Brazilian exports. This macroeconomic headwind is compounded by bearish supply-side forecasts, including a USDA projection for record world production in 2025/26 driven by a 7.9% rise in robusta output. The Brazilian harvest is advancing ahead of its 5-year average, with 90% completed by July 30, adding to near-term supply pressure. However, the market is bifurcated, with distinct fundamentals for arabica and robusta. Robusta faces significant headwinds, evidenced by ICE-monitored inventories rising to a 1-year high and speculative funds increasing net-short positions to a two-year peak. Conversely, arabica fundamentals appear more constructive, as ICE-monitored inventories have fallen to a 14.5-month low, and Volcafe projects the deficit to widen to 8.5 million bags in 2025/26. Supportive factors for arabica also include below-average rainfall in Brazil's Minas Gerais region, which received only 31% of its historical average, and a reported 31% year-over-year drop in Brazil's June green coffee exports.

Key Decisions for Investors

• Given the contrasting fundamentals between arabica and robusta, investors could consider pair trades, such as long arabica futures against short robusta futures, to capitalize on tightening arabica inventories versus rising robusta supply.
• Closely monitor developments on the proposed US tariff on Brazilian coffee, as its implementation would be a significant bearish catalyst, likely increasing Brazilian inventories and pressuring global prices.
• For robusta, note that the record net-short positioning by funds creates a high potential for a violent short-covering rally on any unexpected bullish news, representing a key risk for short-sellers.
• Investors with arabica exposure should track meteorological reports from Brazil's Minas Gerais region, as continued drought conditions could further tighten the projected supply deficit and provide a strong tailwind for prices.