Coffee Prices Surge Amid Drought Concerns and Tighter Global Supplies

March arabica coffee (KCH25) closed up +2.10 (+0.61%) on Thursday, while March ICE robusta coffee (RMH25) increased by +30 (+0.55%).

Record Highs Drive Coffee Market Growth

Coffee prices continued their upward trend this week, with arabica reaching a new record for nearest-futures prices, while robusta hit a six-week peak. This surge is fueled by expectations of a smaller coffee crop in Brazil, leading to tighter supply conditions. Volcafe revised its 2025/26 Brazil arabica coffee production estimate down to 34.4 million bags, a drop of 11 million bags from the September forecast, after a crop tour highlighted the impact of an ongoing drought. Volcafe also predicts a global arabica coffee deficit of -8.5 million bags for 2025/26, worsening from the prior year’s deficit of -5.5 million bags—marking the fifth successive year of shortfalls.

Brazil’s Currency Strengthens Coffee Prices

The strength of the Brazilian real (^USDBRL) has also contributed to the positive trend in coffee prices. On Thursday, the real rose to a six-week high against the dollar, discouraging coffee producers in Brazil from selling exports.

Forecast Adjustments Reflect Crop Challenges

A positive factor supporting coffee prices emerged from Brazil’s government crop forecasting agency, Conab, which reduced its 2024 coffee crop estimate by -1.1% to 54.2 million bags from 54.8 million bags in September.

Weather Woes Challenge Brazil’s Coffee Production

Arabica prices also benefitted from reports of below-normal rainfall in Brazil. Somar Meteorologia noted that Minas Gerais, Brazil’s largest arabica coffee growing region, received only 29.6 mm of rain last week—just 53% of its historical average. Furthermore, consultancy group Safras & Mercado has predicted that Brazil’s 2025/26 coffee crop will fall by 5% year-on-year to 62.45 million bags, with arabica production projected to decline by 15% to 38.35 million bags due to drought conditions.

Persistent Drought Conditions Impacting Region

The effects from the dry El Niño weather patterns last year might lead to long-lasting damage to coffee crops in South and Central America. Since last April, rainfall in Brazil has generally been below average, adversely affecting coffee trees during critical flowering periods. This period has seen some of the driest conditions since 1981, according to Cemaden. Meanwhile, Colombia, the world’s second-largest arabica producer, is gradually recovering from El Niño-induced drought impacts.

Robusta Faces Production Challenges as Well

Robusta coffee prices stand strong due to reduced production levels. In Vietnam, drought conditions have caused coffee production for the 2023/24 crop year to drop by 20% to 1.472 million metric tons, marking the smallest output in four years. The USDA Foreign Agricultural Service (FAS) projected that Vietnam’s robusta production is expected to decrease slightly to 27.9 million bags in the new marketing year of 2024/25. In a conflicting report, the Vietnam Coffee and Cocoa Association recently raised its 2024/25 production estimate to 28 million bags from an earlier forecast of 27 million bags.

Brazil’s Export Boom Potentially Weakens Prices

While higher coffee exports from Brazil could depress prices, recent reports indicate a significant uptick. On Wednesday, Cecafe reported that Brazil’s 2024 arabica coffee exports surged 20% year-on-year to a record 37 million bags, and robusta exports soared 98% to 9.4 million bags.

Increasing Inventories Signal Bearish Pressures on Coffee

Growing inventories also pose a potential risk for coffee prices; as of January 6, ICE-monitored arabica coffee inventories reached their highest level in two and a half years at 993,562 bags. Additionally, robusta inventories rose to a three and a half month high of 4,592 lots last Thursday.

Global Production and Consumption Trends

Recent global coffee export trends could also impact prices negatively. The International Coffee Organization (ICO) reported a 15.1% year-on-year increase in global coffee exports at the start of the 2024/25 season, totaling 11.13 million bags. For the 2023/24 season, overall global coffee exports increased by 11.7% year-on-year to 137.27 million bags. Bearish news continued with Cecafe stating that Brazil’s 2024 coffee exports had also climbed, up 30.2% year-on-year to 46.3 million bags.

USDA Projections Offer Mixed Signals

The USDA’s biannual report released on December 18 provides mixed insights for coffee prices. The Foreign Agriculture Service (FAS) projected a 4.0% year-on-year increase in world coffee production for 2024/25, reaching 174.855 million bags, with arabica production rising by 1.5% to 97.845 million bags and robusta production by 7.5% to 77.01 million bags. However, the USDA forecasts that ending stocks will decrease by 6.6% to a 24-year low of 20.867 million bags. Separately, the USDA’s FAS on November 22 revised Brazil’s 2024/25 coffee production estimate down to 66.4 million metric tons from a prior forecast of 69.9 million metric tons.

On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article are solely for informational purposes. For more information, please view the Barchart Disclosure Policy
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