Dollar Weakness Supports Coffee Prices

Coffee futures settled mixed Wednesday, with arabica rising slightly and robusta remaining unchanged, influenced by a weaker dollar and short covering. Gains were capped by rising ICE coffee inventories, including robusta stocks hitting an 8-month high and arabica stocks reaching a 3.5-month high. Overall, coffee prices have been pressured by forecasts of increased production in Brazil and Vietnam despite concerns over adverse weather in Brazil and reduced exports.

Analysis

Coffee prices exhibited mixed behavior, with July arabica (KCN25) closing up +0.27% while July ICE robusta (RMN25) remained unchanged, influenced by a weakening U.S. dollar that prompted short covering. However, price gains were constrained by rising ICE-monitored coffee inventories; robusta stocks reached an 8-month high of 5,341 lots, and arabica inventories climbed to a 3.5-month high of 876,019 bags. The market remains under pressure from optimistic production forecasts for the 2025/26 season, including the USDA's Foreign Agriculture Service (FAS) projecting a +0.5% year-over-year increase in Brazil's output to 65 million bags and a +6.9% rise in Vietnam's production to 31 million bags. Similar upward revisions come from Safras & Mercado and Conab for Brazilian crops. Demand-side concerns also weigh on prices, as major importers like Starbucks, Hershey, and Mondelez International anticipate that a baseline 10% U.S. import tariff could elevate prices and dampen sales volumes. Conversely, near-term downside may be limited by adverse weather in Brazil's Minas Gerais region, which received only 12% of its historical average rainfall (2.5 mm) in the week ending May 17. Supportive factors also include a significant -28% year-over-year drop in Brazil's April green coffee exports to 3.05 million bags and a -20% reduction in Vietnam's 2023/24 coffee production to a four-year low of 1.472 MMT due to drought. While the USDA FAS forecasts a +4.0% increase in global 2024/25 coffee production to 174.855 million bags, it also projects 2024/25 ending stocks to fall by -6.6% to a 25-year low of 20.867 million bags. Furthermore, Volcafe anticipates a widening global arabica deficit of -8.5 million bags for 2025/26, marking the fifth consecutive year of deficits, and significantly cut its 2025/26 Brazil arabica production estimate due to drought.

Key Decisions for Investors

• Monitor Brazilian weather patterns and rainfall data in Minas Gerais, as well as ongoing coffee export figures from both Brazil and Vietnam, given their significant immediate impact on price sentiment amidst conflicting supply forecasts.
• Evaluate the divergence between rising short-term ICE inventories and projections of critically low global ending stocks (a 25-year low per USDA FAS) and widening arabica deficits (per Volcafe), as this dichotomy suggests potential for continued price volatility.
• For equities like Starbucks (SBUX), Hershey (HSY), and Mondelez (MDLZ), assess their vulnerability to potential U.S. tariffs and fluctuating coffee input costs, considering their hedging strategies and the potential impact on consumer demand.