Coffee Prices Tumble on the Outlook for Higher Global Coffee Output

Coffee prices are sharply lower, with arabica falling to a 7-week low and robusta to a 6-1/2 month low, driven by forecasts of increased coffee production in Brazil and Vietnam for the 2025/26 season from the USDA and other firms. Rising ICE-monitored coffee inventories are adding to the downward pressure, despite concerns about adverse weather in Brazil potentially impacting crop yields and reduced coffee exports from Vietnam due to drought.

Analysis

Coffee prices are experiencing significant downward pressure, with July arabica (KCN25) declining -2.41% to a 7-week low and July ICE robusta (RMN25) falling -2.51% to a 6-1/2 month low. This bearish trend is primarily attributed to expectations of increased global coffee production and ample supplies. Specifically, the USDA's Foreign Agricultural Service (FAS) projects Brazil's 2025/26 coffee output to rise by 0.5% year-over-year (y/y) to 65 million bags and Vietnam's production to increase by 6.9% y/y to 31 million bags. These forecasts are corroborated by Safras & Mercado, which raised its Brazil 2025/26 production estimate to 65.51 million bags, and Conab, which lifted its Brazil 2025 estimate to 55.7 million bags. Further contributing to supply optimism, Honduras, Central America's largest producer, is expected to see a 5.1% y/y production increase in 2025/26. Rising ICE-monitored inventories, with robusta stocks at an 8-month high (5,438 lots) and arabica inventories at a 3-3/4 month high (892,468 bags), are also weighing on prices. Demand concerns add another layer of bearish sentiment, as major importers like Starbucks, Hershey, and Mondelez International have indicated that a potential 10% US import tariff could inflate prices and dampen sales volumes.

Despite the prevailing bearish factors, several elements offer potential price support. Adverse weather in Brazil's key arabica growing region of Minas Gerais, which received only 0.3 mm of rain (4% of the historical average) in the week ended May 24, raises concerns about crop yields. Reduced coffee exports from Brazil, with April green coffee exports down -28% y/y and Jan-Apr exports falling -15.5% y/y, also signal tighter immediate supply. Vietnam, the largest robusta producer, experienced a -20% drop in its 2023/24 crop due to drought, leading to a -17.1% y/y decline in 2024 coffee exports, and its Jan-Apr 2025 exports are down -9.8% y/y. The Vietnam Coffee and Cocoa Association has also cut its 2024/25 production estimate. However, Rabobank counters some of this by predicting Brazil's 2025/26 robusta crop will climb +7.3% y/y to a record 24.7 million bags.

The broader outlook remains mixed. The USDA's FAS December report projected a 4.0% increase in world coffee production for 2024/25 but also forecast 2024/25 ending stocks to fall -6.6% to a 25-year low. Conversely, Volcafe sharply cut its 2025/26 Brazil arabica production estimate due to drought and projects a global 2025/26 arabica deficit of -8.5 million bags, marking the fifth consecutive year of deficits. This complex interplay of near-term supply optimism, current logistical and weather-related disruptions, and conflicting long-term supply forecasts creates an uncertain environment for coffee prices.

Key Decisions for Investors

• Investors should acknowledge the current bearish momentum driven by optimistic production forecasts and rising inventories, but exercise caution given significant weather uncertainties in Brazil and conflicting longer-term supply outlooks, particularly Volcafe's deficit projection for arabica.
• Closely monitor upcoming Brazilian weather reports, particularly rainfall in Minas Gerais, and actual production figures from both Brazil and Vietnam, as these will be critical in determining if the current supply surplus narrative holds.
• For equities like Starbucks (SBUX), Hershey (HSY), and Mondelez International (MDLZ), assess potential margin impacts from proposed US import tariffs and the contrasting scenarios of either ample coffee supply or tightening conditions, especially for arabica.
• Given the divergent data points—increased production forecasts versus ongoing weather concerns and predicted long-term deficits—consider strategies to manage potential price volatility in coffee futures or related assets.