Coffee Prices Rebound as Dollar Weakness Spurs Short Covering

Coffee futures saw a slight recovery Friday, driven by short covering after a weaker dollar, though both arabica and robusta initially hit multi-week lows due to rising ICE inventories. Increased supply forecasts from the USDA for Brazil and Vietnam's 2025/26 coffee production, coupled with concerns about demand due to potential tariff impacts on major importers, continue to weigh on prices; however, weather concerns in Brazil and reduced exports may limit further downside in the near term, particularly for arabica.

Analysis

Coffee futures (July arabica KCN25 +0.07%, July ICE robusta RMN25 +0.06%) experienced a marginal end-of-week recovery, primarily attributed to short covering spurred by a decline in the dollar index, after both contracts had earlier touched multi-week lows. The initial price weakness was driven by an increase in ICE-monitored inventories, with robusta stocks climbing to an 8-month high of 5,438 lots and arabica inventories reaching a 3-3/4 month high of 886,590 bags. The overarching market sentiment remains pressured by expectations of higher global coffee production in the 2025/26 season; notably, the USDA's Foreign Agriculture Service (FAS) projects Brazil's output to increase by +0.5% year-over-year to 65 million bags and Vietnam's by +6.9% to 31 million bags. These projections are further supported by upward revisions from Safras & Mercado and Conab for Brazilian production. Additionally, demand-side concerns are surfacing, with major commodity importers such as Starbucks, Hershey, and Mondelez International highlighting that potential US tariffs could lead to increased consumer prices and consequently dampen sales volumes.

Despite these bearish elements, several counter-factors provide underlying support and may limit further downside. Significant concerns persist over Brazil's upcoming arabica crop due to poor weather in the key Minas Gerais region, which received only 2.5 mm of rain (12% of the historical average) in the week ending May 17. This is corroborated by a substantial -28% year-over-year decrease in Brazil's April green coffee exports, with Jan-Apr exports also down by -15.5%. The robusta market draws support from Vietnam's 2023/24 crop suffering a -20% reduction due to drought, which has curtailed exports. While the USDA's December report indicated a +4.0% rise in 2024/25 world production, it crucially forecasted a -6.6% fall in global ending stocks to a 25-year low of 20.867 million bags. Volcafe's analysis reinforces supply tightness, particularly for arabica, by significantly reducing its 2025/26 Brazil arabica production estimate and projecting an expanded global arabica deficit of -8.5 million bags, marking the fifth consecutive year of deficit. This creates a complex market dynamic, weighing near-term inventory accumulation and optimistic production forecasts against substantial weather-related supply uncertainties and historically low global stock levels.

Key Decisions for Investors

• Investors should closely monitor Brazilian weather patterns and rainfall data, as these are pivotal for arabica supply and could substantially influence price trajectories.
• Given the conflicting data points—higher future production forecasts versus current export declines and projected critically low ending stocks, particularly for arabica—consider strategies that can navigate potential price volatility and the differing fundamentals between arabica and robusta.
• For equities like Starbucks (SBUX), Hershey (HSY), and Mondelez (MDLZ), the dual risks of increased input costs from potential tariffs or supply disruptions, alongside existing demand pressures, necessitate careful scrutiny of their gross margins and sales volume trends.