Recent Rain in Brazil Eases Dry Conditions and Weighs on Coffee Prices

Coffee futures declined, with arabica hitting a 2-1/4 month low, driven by easing concerns over dryness in Brazil due to recent rainfall in Minas Gerais, which received 131% of its historical average rainfall. Limiting the downside was the Brazilian real's strength against the dollar, discouraging export selling; however, rising ICE-monitored arabica inventories, which remain near a 4-1/2 month high, continue to weigh on prices. While robusta is supported by declining ICE inventories and reduced Vietnamese production, overall coffee prices face pressure from Brazil's ongoing harvest and forecasts of increased global production.

Analysis

Coffee prices are exhibiting divergent pressures, with July arabica futures (KCN25) declining -1.98% to a 2-1/4 month low, primarily influenced by improved weather conditions in Brazil's Minas Gerais region, which received 10.6 mm of rain, 131% of the historical average, alleviating dryness concerns. This bearish sentiment for arabica is compounded by ICE-monitored inventories remaining near a 4-1/2 month high at 852,849 bags and the ongoing Brazilian harvest, reported as 35% complete by Safras & Mercado, aligning with the 5-year average. Conversely, the downside for coffee prices is somewhat limited by the Brazilian real strengthening to an 8-1/4 month high against the dollar, discouraging exports, and a notable -36% year-over-year drop in Brazil's May green coffee exports. July robusta coffee (RMN25), down -0.60%, finds support from ICE-monitored inventories falling to a 1-month low and significantly reduced Vietnamese production in the 2023/24 crop year (-20% y/y) due to drought, alongside lower export figures from Vietnam. Despite these supportive elements for robusta, broader market sentiment faces pressure from USDA FAS forecasts of increased global production for 2025/26 from both Brazil (+0.5% y/y) and Vietnam (+6.9% y/y). Conflicting outlooks persist, with Volcafe projecting a widening global arabica deficit for 2025/26, while the USDA FAS also anticipates global 2024/25 ending stocks will fall by -6.6% to a 25-year low, suggesting a complex supply-demand picture.

Key Decisions for Investors

• Investors should closely monitor Brazilian weather patterns and harvest progress, as these are primary drivers for arabica prices, and also consider the impact of the strengthening Brazilian real which may temper export selling pressure.
• Evaluate the contrasting supply dynamics between arabica, pressured by the Brazilian harvest and high inventories, and robusta, supported by low current inventories and reduced Vietnamese exports, for potential relative value or spread trading opportunities.
• Be prepared for continued market volatility due to conflicting long-term supply forecasts, such as the USDA's projected increase in global production versus Volcafe's anticipated arabica deficit and the USDA's forecast for historically low global ending stocks, necessitating careful risk management.