Coffee Prices Settle Higher as the Brazilian Real Rallies

Coffee prices rose Monday, buoyed by strength in the Brazilian real, which reached an 8-month high against the dollar and discouraged export selling. Earlier price declines, driven by above-average rainfall in Brazil's coffee-growing regions easing drought concerns and harvest progress, were offset by the currency movement. Despite forecasts of increased coffee production in Brazil and Vietnam for 2025/26, the real's strength provided bullish momentum, while demand concerns and rising ICE coffee inventories continue to exert downward pressure.

Analysis

Coffee prices saw a notable daily increase, with July arabica up +0.98% and robusta +1.85%, primarily due to the Brazilian real reaching an 8-month high against the dollar, which discouraged export selling from Brazil. This currency-driven strength countered earlier bearish sentiment from above-normal rainfall in Brazil's Minas Gerais region (207% of the historical average for the week ended June 7) and harvest progress (28% complete by June 4). The market has faced recent downward pressure, with arabica and robusta hitting multi-month lows, amid expectations of increased global output; the USDA's Foreign Agricultural Service (FAS) forecasts Brazil's 2025/26 production to rise 0.5% y/y and Vietnam's by 6.9% y/y, with other agencies like Safras & Mercado also revising Brazilian estimates upwards. Rising ICE-monitored inventories for both arabica (4-1/4 month high) and robusta (8-3/4 month high) further pressure prices. However, offsetting these bearish signals are Brazil's significantly lower April green coffee exports (-28% y/y), Vietnam's drought-reduced 2023/24 crop (-20%), and Volcafe's projection of a substantial -8.5 million bag global arabica deficit for 2025/26. Furthermore, the USDA FAS anticipates global 2024/25 ending stocks will hit a 25-year low, despite projecting a 4.0% y/y rise in world production. Demand concerns also persist, with major importers like Starbucks, Hershey, and Mondelez International indicating potential negative sales impacts from US tariffs.

Key Decisions for Investors

• Closely monitor Brazilian real exchange rate movements as a key short-term driver of coffee price volatility and Brazilian export decisions.
• Scrutinize upcoming crop reports from Brazil and Vietnam to reconcile conflicting production forecasts and assess the true supply outlook for the 2025/26 season.
• Factor in potential demand headwinds from US tariffs, which could impact consumption and the performance of coffee-reliant companies like Starbucks, Hershey, and Mondelez.
• Balance the bearish signal of rising ICE inventories against bullish long-term projections of record-low global ending stocks and persistent arabica deficits when assessing market direction.