Ample Inventories and Prospects for Higher Production Undercut Coffee Prices

Coffee futures are sharply lower today, with arabica falling to a 5-week low and robusta to a 6-week low, primarily driven by rising ICE coffee inventories and forecasts of increased coffee production in Brazil and Vietnam for the 2025/26 season; however, concerns about adverse weather in Brazil potentially impacting crop size and reduced coffee exports from Brazil may limit further downside in the near term.

Analysis

Coffee futures experienced sharp declines, with July arabica (KCN25) falling -2.78% to a 5-week low and July ICE robusta (RMN25) down -2.20% to a 6-week low, primarily driven by an increase in ICE-monitored coffee inventories; robusta stocks reached an 8-month high of 5,425 lots, and arabica inventories rose to a 3.5-month high of 876,019 bags. This immediate bearish pressure is compounded by forecasts for higher coffee production in the 2025/26 season, with the USDA's Foreign Agriculture Service (FAS) projecting Brazil's output to climb +0.5% y/y to 65 million bags and Vietnam's to rise +6.9% y/y to 31 million bags, alongside upward revisions from Safras & Mercado and Conab for Brazil. However, several factors may limit further downside. Poor weather in Brazil's Minas Gerais region, which received only 2.5 mm of rain (12% of historical average) in the week ended May 17, raises concerns for the upcoming crop. Current supply tightness is indicated by Brazil's April green coffee exports falling -28% y/y and Vietnam's 2023/24 crop dropping -20% due to drought, leading to its 2024 exports falling -17.1% y/y. Contradictory long-term outlooks exist, with Volcafe projecting a significant global 2025/26 arabica deficit of -8.5 million bags and the USDA FAS forecasting 2024/25 global ending stocks to hit a 25-year low, despite also projecting a 4.0% y/y increase in world production for 2024/25. Demand-side concerns also weigh on prices, as major importers like Starbucks, Hershey, and Mondelez International have indicated that potential US import tariffs could increase prices and pressure sales volumes.

Key Decisions for Investors

• Investors should closely monitor Brazilian weather patterns, particularly rainfall in Minas Gerais, as this is a critical near-term variable for arabica supply that could counteract bearish sentiment from current inventory levels.
• Carefully scrutinize upcoming production estimates and actual export data from both Brazil and Vietnam, given the conflicting forecasts from various agencies (e.g., USDA FAS vs. Volcafe) which contribute to market uncertainty.
• Consider the mixed fundamental signals, with current inventory builds and positive long-term production forecasts creating downward pressure, while immediate weather risks, reduced current exports, and projected structural deficits offer potential support, suggesting a cautious approach to new positions.
• Evaluate the potential impact of proposed US import tariffs on demand from major coffee-consuming companies and, consequently, on overall coffee bean prices.