Coffee Prices Surge Amid Persistent Drought in Brazil and Dollar Weakness

Coffee prices have seen an increase due to drought conditions in Brazil, which has affected production. The dollar’s weakness and a rise in coffee inventories are contributing factors, yet concerns about long-term crop damages persist. Reports suggest significant upcoming global deficits in coffee production, especially for arabica coffee.

Coffee prices have recently increased due to below-normal rainfall in Brazil, affecting coffee production. Reports indicate that Brazil’s leading arabica coffee region, Minas Gerais, received only 1.1 mm of rain, which is merely 2% of the historical average. Additionally, the dollar index has declined, reaching a four-and-a-half month low, further supporting the rise in coffee prices. For May, arabica coffee is up 1.59%, while robusta coffee has risen by 3.18%.

The rise in coffee inventories can negatively influence prices. The ICE-monitored arabica inventories reached a week-high of 799,406 bags, while robusta inventories also increased to a one-month high of 4,356 lots. A report from Marex Solutions anticipates a significant coffee surplus for the 2025/26 season, widening to 1.2 million bags compared to the previous year’s surplus of 200,000 bags.

Robusta coffee prices are diminished by rising exports from Vietnam, which reported a 6.6% year-on-year increase in coffee exports, amounting to 169,000 MT in February. Vietnam remains the world’s largest producer of robusta coffee beans. Conversely, the ongoing supply concerns are buoying coffee prices, evident from recent declines in Brazil’s green coffee exports and forecasts of reduced coffee crop yields for the upcoming years.

The impacts of last year’s dry El Niño weather pattern pose a risk of long-term crop damage in Colombia and Brazil. Notably, Brazil has endured its driest conditions since 1981, leading to lower prospects for the 2025/26 arabica coffee crop due to underwhelming rainfall during critical growth periods. Colombia, the second largest producer, is slowly emerging from drought.

Robusta coffee prices are supported by reduced production stemming from drought conditions. Vietnam’s coffee output for the 2023/24 season is projected to decrease by 20% to 1.472 million metric tons. The USDA FAS anticipates a slight decline in robusta coffee production for the 2024/25 season. In contrast, a slight uptick in Vietnam’s coffee production estimates signifies a mixed outlook for the future.

Concerning global coffee exports, reports indicate bearish trends for prices. Brazil’s coffee exports skyrocketed to a record level, while global exports decreased in late 2022. The USDA anticipates a mixed impact on coffee prices in its December report, forecasting an overall increase in global coffee production, though projecting significant declines in Brazil’s production estimates for the subsequent years.

For the 2025/26 marketing year, Volcafe has revised Brazil’s arabica coffee production estimate sharply downward, highlighting the prolonged drought’s severe toll on crop yields. They project a notable global deficit for arabica coffee, marking the continuation of years of deficits.

In summary, the rise in coffee prices is significantly influenced by unfavorable weather conditions in Brazil and a depreciating dollar. While rising inventories and increased exports from Vietnam present bearish pressure, long-term concerns regarding crop yields and supply chain disruptions continue to support coffee prices. The outlook indicates growing deficits in arabica coffee production, necessitating close monitoring of future market trends.

Original Source: www.tradingview.com