Coffee Prices Pressured by Expectations of Larger Global Coffee Supplies

Coffee futures are declining, with arabica hitting a 7-week low and robusta a 6-1/2 month low, driven by forecasts of increased production in Brazil and Vietnam, as highlighted by the USDA. Rising ICE coffee inventories are further pressuring prices, despite concerns about adverse weather in Brazil potentially impacting crop yields and reduced coffee exports from Brazil and Vietnam. Demand concerns are also weighing on prices as several global commodity importers said the US's baseline 10% tariff on imports would raise prices and further pressure sales volumes.

Analysis

July arabica coffee (KCN25) has declined by -2.85 (-0.81%) and July ICE robusta coffee (RMN25) by -19 (-0.41%), extending their month-long slide with arabica reaching a 7-week low and robusta a 6-1/2 month low. This downturn is primarily driven by expectations of increased global production and ample near-term supplies. The USDA's Foreign Agricultural Service (FAS) projects Brazil's 2025/26 coffee production to rise by 0.5% year-over-year (y/y) to 65 million bags and Vietnam's output to increase by 6.9% y/y to 31 million bags. Reinforcing this bearish sentiment, ICE-monitored robusta inventories rose to an 8-month high of 5,438 lots, and arabica inventories reached a 3-3/4 month high of 892,468 bags. Further production increases are anticipated from Honduras (+5.1% y/y for 2025/26), and both Safras & Mercado and Conab have revised their Brazil 2025/26 and 2025 production estimates upwards, respectively. However, countervailing bullish factors persist: poor weather in Brazil's Minas Gerais (receiving only 0.3 mm of rain, 4% of the historical average in the week ended May 24), significantly reduced April green coffee exports from Brazil (-28% y/y), and a substantial drop in Vietnam's 2023/24 crop (-20%) due to drought, leading to lower exports from the largest robusta producer. Long-term, Volcafe projects a widening global arabica deficit of -8.5 million bags for 2025/26, marking the fifth consecutive year of deficits, while the USDA FAS also forecasts 2024/25 global ending stocks to fall by -6.6% to a 25-year low. Demand-side concerns, stemming from potential US import tariffs that could raise prices and pressure sales volumes for major importers like Starbucks, Hershey, and Mondelez, add another layer of complexity to the current market outlook.

Key Decisions for Investors

• Investors should closely monitor upcoming weather reports for Brazil's and Vietnam's coffee-growing regions, as well as inventory levels, as these factors could significantly influence price direction given current sensitivities.
• Given the conflicting signals of increased near-term supply forecasts versus projected long-term deficits and current export reductions, a cautious approach to coffee futures is advisable, potentially awaiting clearer market trends or focusing on spread opportunities between arabica and robusta.
• For equities, consideration should be given to the potential impact of US import tariffs on companies like Starbucks, Hershey, and Mondelez, which could face margin pressure or reduced sales volumes if such tariffs are broadly applied to coffee imports.