Coffee Prices Pressured by Beneficial Rain in Brazil

Coffee futures declined today, with July arabica down 1.17% and July robusta down 1.24%, reversing earlier gains on news of beneficial rainfall in Brazil's Minas Gerais, the largest arabica-growing region, which received 131% of its average rainfall for the week. The harvest in Brazil continues, with arabica slowed by heavy rain in some areas, while robusta is supported by ICE-monitored inventories falling to a one-month low. Despite near-term pressure from the ongoing harvest, the USDA forecasts a slight increase in Brazil's 2025/26 coffee production, while Volcafe projects a global arabica deficit, indicating mixed signals for future price direction.

Analysis

Coffee futures are experiencing downward pressure, with July arabica (KCN25) declining 1.17% and July robusta (RMN25) falling 1.24%, primarily due to beneficial rainfall in Brazil's Minas Gerais region, which received 131% of the historical average for the week, potentially improving crop prospects. This weather development reversed earlier price gains that were supported by the Brazilian real (^USDBRL) strengthening to an 8-1/4 month high against the dollar, a factor that typically discourages exports from Brazil. The ongoing Brazilian coffee harvest further contributes to current bearish sentiment; Cooxupe reported harvest completion at 13.7%, similar to last year, while Safras & Mercado indicated the 2025/26 harvest is 35% complete, aligning with the 5-year average, although heavy rains have reportedly slowed arabica progress in some areas. Despite this, ICE-monitored arabica inventories remain elevated at 846,291 bags, near a recent 4-1/4 month high. In contrast, robusta coffee finds some support from ICE-monitored inventories for the variety falling to a 1-month low of 5,177 lots and from a significant -20% year-over-year reduction in Vietnam's 2023/24 production due to drought, which also led to a -17.1% y/y drop in its 2024 exports. The medium-term outlook is characterized by conflicting signals: the USDA's Foreign Agricultural Service (FAS) forecasts a modest 0.5% y/y increase in Brazil's 2025/26 production to 65 million bags and a 6.9% y/y rise in Vietnam's 2025/26 output to 31 million bags. However, Brazil's May green coffee exports plummeted -36% y/y. Globally, while the USDA anticipates a 4.0% y/y increase in 2024/25 world coffee production, it also projects 2024/25 ending stocks to decline by -6.6% to a 25-year low. Compounding this uncertainty, Volcafe forecasts the global 2025/26 arabica coffee deficit to widen to -8.5 million bags, marking a fifth consecutive year of deficits. This divergence between immediate harvest pressure, currency movements, and varied forward-looking supply and demand estimates creates a complex and potentially volatile market environment.

Key Decisions for Investors

• Investors should closely monitor Brazilian harvest progression and localized weather impacts, particularly for arabica, as well as Brazilian real fluctuations which influence export decisions and short-term price movements.
• It is crucial to weigh the USDA's forecast of increased 2025/26 production against Volcafe's projection of a widening arabica deficit and critically low global ending stocks, as this fundamental divergence points to sustained market volatility and potential price inflection points.
• Differentiating strategies for arabica and robusta may be warranted; robusta could find more relative support from current Vietnamese supply constraints and lower ICE inventories, while arabica faces immediate pressure from the ongoing Brazilian harvest and higher observed stock levels.
• Given the conflicting data points and mixed sentiment, adopting a cautious stance or employing strategies designed for a volatile market, such as range trading or selective hedging, may be prudent until clearer long-term global supply trends solidify.