Brazil Coffee Harvest Pressures Weigh on Prices

Coffee prices, notably September arabica, continued their decline, with arabica falling to a contract low and nearest-futures reaching a 7.5-month low, primarily driven by an advancing Brazilian harvest and improved weather conditions easing dryness concerns. Bearish sentiment is further reinforced by USDA/FAS forecasts projecting a 2.5% increase in global coffee production for 2025/26 to a record 178.68 million bags, led by expected output gains in Brazil and Vietnam, which is anticipated to boost ending stocks by 4.9%. While robusta prices received some support from tightening inventories and reduced exports from Brazil and Vietnam, the overall outlook for abundant supply continues to pressure the market, despite Volcafe forecasting a widening arabica deficit for 2025/26.

Analysis

Coffee prices are under significant pressure, with September arabica futures hitting a contract low and the nearest-futures contract reaching a 7.5-month low. This bearish momentum is primarily driven by the advancing harvest in Brazil, which is expected to accelerate due to forecasts for dry conditions. While the current harvest pace is slightly behind last year's levels, with Cooxupe reporting 31% completion versus 42% a year prior, it remains in line with the 5-year average. The market sentiment is heavily influenced by the USDA's Foreign Agricultural Service (FAS) forecast, which projects a 2.5% year-over-year increase in global coffee production for 2025/26 to a record 178.68 million bags, coupled with a 4.9% rise in ending stocks. This outlook for abundant supply, bolstered by a 6.9% expected output increase from Vietnam to a 4-year high, is currently outweighing countervailing bullish factors. These include a sharp 36% year-over-year drop in Brazil's May green coffee exports, tightening ICE-monitored robusta inventories, and a conflicting forecast from Volcafe projecting a widening arabica deficit for the fifth consecutive year. The market appears to be prioritizing the macro supply outlook from the USDA over near-term export disruptions and alternative deficit models.

Key Decisions for Investors

• Given the prevailing bearish sentiment driven by strong production forecasts and favorable harvest weather, investors should exercise caution with long positions in arabica futures as current price action reflects expectations of a supply surplus.
• Monitor the divergence between arabica and robusta fundamentals; while the broad market is weak, tighter robusta supplies could present opportunities for spread trades (long robusta/short arabica).
• Closely track the pace of the Brazilian harvest relative to its 5-year average and watch for any revisions to production forecasts from the USDA or other agencies, as a significant deviation could serve as a catalyst to shift market sentiment.
• The primary risk to short positions is a material weather event in key growing regions or a supply disruption that validates the deficit narrative forecasted by Volcafe, warranting close attention to weather patterns in Brazil and Vietnam.