Coffee Prices Rally on Dollar Weakness

Coffee prices rebounded today, driven by a weaker dollar index, after facing downward pressure from forecasts of increased coffee production in Brazil and Vietnam for the 2025/26 season, as highlighted by the USDA. Concerns about weather impacting Brazil's crop and reduced exports from Brazil are providing some price support, while robusta benefits from reduced Vietnamese production due to drought; however, demand concerns stemming from US import tariffs and rising ICE coffee inventories continue to weigh on the market.

Analysis

Coffee prices (July arabica KCN25 +0.62%, July ICE robusta RMN25 +0.14%) experienced a modest recovery, primarily attributed to a weakening US dollar index which fell to a 2-week low, prompting short covering, though the broader outlook remains complex with a neutral market sentiment. This rebound occurs amidst predominantly bearish supply-side indicators, including the USDA's Foreign Agriculture Service (FAS) projections for increased 2025/26 coffee production in Brazil (+0.5% y/y to 65 million bags) and Vietnam (+6.9% y/y to 31 million bags), corroborated by upward revisions from Safras & Mercado and Conab for Brazilian output. Rising ICE-monitored inventories, with robusta at an 8-month high (5,341 lots) and arabica at a 3.25-month high (866,951 bags), alongside faster Brazilian 2024/25 coffee sales, further suggest ample supply. Demand concerns also weigh on the market, as major importers like Starbucks (SBUX), Hershey (HSY), and Mondelez International (MDLZ) anticipate that US import tariffs could elevate prices and dampen sales volumes, reflected in slightly negative sentiment for these tickers. However, countervailing factors offer potential support: poor rainfall in Brazil's Minas Gerais (12% of historical average) raises concerns for the upcoming crop, and Brazil's April green coffee exports fell -28% y/y. For robusta, Vietnam's 2023/24 crop dropped -20% y/y due to drought, leading to significantly reduced exports. While the USDA FAS projects a +4.0% y/y increase in global 2024/25 production, it also forecasts ending stocks to fall -6.6% to a 25-year low, and Volcafe anticipates a substantial global arabica deficit of -8.5 million bags for 2025/26, the fifth consecutive deficit year, highlighting persistent supply tightness concerns for arabica despite broader production increase forecasts.

Key Decisions for Investors

• Investors should closely monitor Brazilian weather data for its potential to significantly alter arabica supply forecasts, which currently indicate an increase but face drought risks.
• Scrutinize upcoming export figures from Brazil and Vietnam, as these will provide critical validation of, or divergence from, current production estimates and impact price discovery for both arabica and robusta.
• For equities like Starbucks, Hershey, and Mondelez, assess the risk of margin compression and reduced sales volumes stemming from potential US import tariffs on coffee inputs.
• Given the conflicting signals of higher near-term production forecasts versus projections for critically low global ending stocks and a widening arabica deficit, traders should prepare for continued volatility in coffee futures and consider strategies that account for these divergent fundamental pressures.