Coffee Prices Sharply Lower on Expectations of Robust Global Supplies

Coffee prices declined sharply, with arabica hitting a 7-week low and robusta 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 like Safras & Mercado and Conab. Rising ICE coffee inventories, particularly in robusta, further pressured prices, while concerns about a U.S. import tariff potentially impacting demand added to the bearish sentiment, though weather concerns in Brazil and reduced exports offered some price support.

Analysis

Coffee prices experienced a sharp downturn, with July arabica (KCN25) reaching a 7-week low and July ICE robusta (RMN25) a 6-1/2 month low, predominantly driven by expectations of increased global coffee production. The USDA's Foreign Agricultural Service (FAS) forecasts Brazil's 2025/26 coffee output to rise 0.5% y/y to 65 million bags and Vietnam's 2025/26 production to increase 6.9% y/y to 31 million bags; Brazil and Vietnam are the world's largest arabica and robusta producers, respectively. These projections are reinforced by Safras & Mercado raising its Brazil 2025/26 coffee production estimate to 65.51 million bags and Conab increasing its Brazil 2025 estimate to 55.7 million bags. Further downward pressure stems from rising ICE-monitored coffee 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). Demand-side concerns, including potential U.S. import tariffs impacting sales volumes for companies like Starbucks, Hershey, and Mondelez International, also weigh on prices. Conversely, some supportive factors exist: Somar Meteorologia reported significantly below-average rainfall in Brazil's Minas Gerais region (0.3 mm, 4% of historical average), and Cecafe noted Brazil's April green coffee exports fell -28% y/y. Vietnam's 2023/24 robusta production dropped -20% due to drought, and its 2024 coffee exports fell -17.1% y/y, with Jan-Apr 2025 exports also down -9.8% y/y. Despite Volcafe projecting a widening global arabica deficit for 2025/26 to -8.5 million bags—the fifth consecutive year—and the USDA's FAS forecasting 2024/25 global ending stocks to hit a 25-year low, the immediate market sentiment is dominated by the anticipated supply surge and inventory build-up.

Key Decisions for Investors

• Given current bearish sentiment fueled by robust production forecasts and rising inventories, investors should exercise caution with new long positions in coffee futures, particularly for robusta, in the immediate term.
• Closely monitor upcoming weather reports from Brazil and actual production and export figures from both Brazil and Vietnam, as significant deviations from optimistic supply forecasts could trigger sharp price reversals, especially considering underlying support from Brazil's recent export declines and Vietnam's past crop shortfalls.
• Consider the potential for divergence between arabica and robusta markets; while robusta supply appears to be improving, persistent deficit forecasts for arabica, such as Volcafe's, could present longer-term strategic opportunities or relative value trades.
• For equities with significant coffee input costs, such as Starbucks (SBUX), Hershey (HSY), and Mondelez (MDLZ), assess their vulnerability to proposed U.S. import tariffs and their effectiveness in hedging commodity price fluctuations and managing consumer pricing power, as these factors will be critical to their margin performance.