Lackluster Rain in Brazil Supports Arabica Coffee Prices

Coffee prices settled mixed Tuesday, with arabica rising due to concerns about reduced yields in Brazil stemming from poor rainfall in key growing regions; Minas Gerais received only 4% of its historical average rainfall. However, robusta fell to a 7-week low amid forecasts of increased coffee production in Brazil and Vietnam for the 2025/26 season, as well as rising ICE coffee inventories, which reached multi-month highs. Demand concerns also weigh on prices as commodity importers anticipate tariffs will pressure sales volumes.

Analysis

Coffee markets exhibited a dichotomous performance, with July arabica futures (KCN25) edging up 0.19% primarily due to acute weather concerns in Brazil, where the key Minas Gerais growing region received only 4% of its historical average rainfall in the week ended May 24, potentially impacting future crop yields. This concern, alongside Cecafe's report of a 28% year-over-year decline in Brazil's April green coffee exports, provided immediate support for arabica prices. However, this occurred against a backdrop of recent weakness, with arabica having touched a 6-week low previously, influenced by broader forecasts anticipating higher global coffee production. The USDA's Foreign Agricultural Service, for instance, projected Brazil's 2025/26 coffee production to increase by 0.5% y/y and Vietnam's by 6.9% y/y. In contrast, July ICE robusta futures (RMN25) fell sharply by 1.96% to a 7-week low, pressured by these optimistic production outlooks and rising ICE-monitored inventories; robusta stocks reached an 8-month high, while arabica inventories also climbed to a 3-3/4 month high, suggesting improved near-term supply availability. Despite the bearish sentiment for robusta, significant supply disruptions in Vietnam, the largest robusta producer, offer a counter-narrative: drought conditions caused a 20% drop in Vietnam's 2023/24 crop output, the smallest in four years, and its 2024 coffee exports declined by 17.1% y/y. Demand-side pressures are also pertinent, with major commodity importers like Starbucks, Hershey, and Mondelez International expressing concerns that potential US import tariffs could increase prices and negatively affect sales volumes. While the USDA projects a 4.0% y/y increase in world coffee production for 2024/25, it also forecasts global ending stocks to fall by 6.6% to a 25-year low, introducing complexity. Further complicating the arabica outlook, Volcafe projects a global 2025/26 arabica coffee deficit of -8.5 million bags, marking the fifth consecutive year of deficits.

Key Decisions for Investors

• Monitor Brazilian rainfall data for Minas Gerais and ICE inventory levels closely, as current dryness provides short-term arabica support against broader forecasts of increased global supply and rising stockpiles.
• Evaluate robusta's recent price decline to a 7-week low in the context of Vietnam's significant 2023/24 crop reduction (-20%) and sharply lower exports, which could provide a floor or trigger a rebound if Vietnamese supply constraints persist.
• Assess potential margin pressures and sales volume impacts for coffee-dependent consumer goods companies such as Starbucks, Hershey, and Mondelez, given their stated concerns over US import tariffs and the volatile coffee input cost environment.