Arabica Coffee Supported by Slack Rain in Brazil

Coffee prices are mixed, with arabica supported by concerns over Brazilian weather impacting crop size, while robusta is pressured by rising ICE inventories, which hit an 8-month high. Despite recent USDA forecasts indicating increased coffee production in Brazil and Vietnam for 2025/26, concerns remain about reduced robusta production in Vietnam due to drought, and smaller coffee exports from Brazil. Demand concerns are also present due to potential tariff increases impacting sales volumes for major importers like Starbucks and Hershey.

Analysis

Coffee markets present a bifurcated picture: July arabica (KCN25) shows modest gains (+0.36%) driven by concerns over adverse weather in Brazil's Minas Gerais region, which received only 0.3 mm of rain (4% of historical average) in the week ending May 24, potentially impacting the upcoming crop. Conversely, July ICE robusta (RMN25) declined -1.40%, reaching a 7-week low, pressured by rising inventories. ICE-monitored robusta stocks hit an 8-month high of 5,438 lots, while arabica inventories reached a 3-3/4 month high of 886,590 bags, collectively weighing on prices over the past four weeks. Longer-term production forecasts are mixed: the USDA's Foreign Agricultural Service (FAS) projects a 0.5% y/y increase in Brazil's 2025/26 coffee production to 65 million bags and a 6.9% y/y rise in Vietnam's output to 31 million bags. Safras & Mercado and Conab also revised Brazil's production estimates upward. However, these forecasts are tempered by current supply disruptions: Brazil's April green coffee exports fell 28% y/y, and Jan-Apr exports declined 15.5% y/y. Vietnam's 2023/24 robusta production dropped 20% due to drought, and its 2024 exports are down 17.1% y/y, with Jan-Apr 2025 exports also declining 9.8% y/y. Volcafe projects a significant global arabica deficit of -8.5 million bags for 2025/26, marking the fifth consecutive year of deficits, citing severe drought in Brazil. Demand-side concerns also emerge, with major importers like Starbucks, Hershey, and Mondelez International highlighting potential US tariffs that could increase prices and dampen sales volumes. The USDA's December biannual report indicated a 4.0% rise in 2024/25 world coffee production but also projected 2024/25 ending stocks to fall by 6.6% to a 25-year low.

Key Decisions for Investors

• Investors should closely monitor Brazilian weather patterns and their impact on arabica yields, as this remains a key short-term price driver.
• Given the rising ICE inventories for both arabica and robusta, continued tracking of these stock levels is crucial for assessing near-term supply pressures.
• Consider the contrasting supply outlooks: potential ongoing deficits in arabica versus some projections for increased robusta production, which may warrant different strategies for each coffee type.
• For equity investors in companies like Starbucks (SBUX), Hershey (HSY), and Mondelez (MDLZ), monitor potential impacts of US tariffs on input costs and consumer demand, as highlighted by negative per-ticker sentiment.