Coffee Prices Settle Lower as Global Supply Outlook Improves

Coffee prices declined Thursday, with arabica hitting a 7-week low and robusta a 6 1/2-month low, pressured by forecasts of increased coffee production in Brazil and Vietnam for 2025/26 from the USDA and Safras & Mercado; rising ICE coffee inventories further contributed to the downward trend, though concerns about adverse weather in Brazil and reduced exports offered some support. Conflicting factors, including demand concerns due to potential tariff increases and revised production estimates from various agencies, create uncertainty in the coffee market outlook.

Analysis

Coffee prices have experienced a significant downturn, with July arabica futures (KCN25) falling -1.01% to a 7-week low and July ICE robusta coffee (RMN25) declining -0.57% to a 6-1/2 month low. This month-long slide is primarily attributed to an outlook for increased global coffee production and ample supplies. Specifically, the USDA's Foreign Agricultural Service (FAS) forecasts Brazil's 2025/26 coffee production to rise by 0.5% year-over-year (y/y) to 65 million bags, and Vietnam's 2025/26 output to increase by 6.9% y/y to 31 million bags. Consulting firm Safras & Mercado also raised its Brazil 2025/26 production estimate to 65.51 million bags, and Conab increased its Brazil 2025 estimate to 55.7 million bags. Further pressuring prices, ICE-monitored robusta inventories reached an 8-month high of 5,438 lots, and arabica inventories rose to a 3-3/4 month high of 892,468 bags. Demand-side concerns also weigh on the market, with major importers like Starbucks, Hershey, and Mondelez International indicating that potential U.S. tariffs could elevate prices and dampen sales volumes. Conversely, some factors offer support to coffee prices. Poor weather in Brazil's Minas Gerais region, which received only 0.3 mm of rain (4% of the historical average) in the week ending May 24, raises concerns about crop yields. Brazil's April green coffee exports fell -28% y/y, and Jan-Apr exports were down -15.5% y/y. Vietnam, the largest robusta producer, saw its 2023/24 crop drop by -20% due to drought, and its 2024 coffee exports fell -17.1% y/y, with Jan-Apr 2025 exports also down -9.8% y/y. The Vietnam Coffee and Cocoa Association also cut its 2024/25 production estimate. However, Rabobank predicts Brazil's 2025/26 robusta crop will climb +7.3% y/y. The USDA's broader outlook is mixed: while global production for 2024/25 is projected to increase +4.0%, ending stocks are forecast to fall by -6.6% to a 25-year low. Volcafe projects a global 2025/26 arabica coffee deficit of -8.5 million bags, marking the fifth consecutive year of deficits, despite cutting its Brazil arabica production estimate significantly due to drought. The overall market sentiment is mixed, reflecting these conflicting supply, demand, and inventory signals.

Key Decisions for Investors

• Investors should closely monitor upcoming weather developments in Brazil and production/export figures from both Brazil and Vietnam, as these remain key swing factors for price direction.
• Consider the potential for continued short-term price weakness due to current production forecasts and inventory builds, but remain alert to underlying support from adverse weather, reduced exports from key regions, and projected long-term arabica deficits which could trigger price reversals.
• For equity investors in companies like Starbucks, Hershey, and Mondelez, evaluate their exposure to coffee price volatility and potential tariff impacts, assessing their hedging strategies and ability to pass on increased costs to consumers.
• Given the conflicting data and forecasts, a cautious stance is warranted; range-bound trading strategies might be appropriate, or investors may prefer to await clearer market signals before making significant directional bets.