Brazilian Real’s Decline Drives Coffee Prices Down Amid Global Supply Concerns

In recent developments, the coffee market has experienced a notable decline in prices. September arabica coffee (KCU24) fell by -5.15 (-2.25%), and July ICE robusta coffee (RMN24) decreased by -83 (-1.89%). The primary driver behind this trend is the weakness in the Brazilian real (BRL), which has tumbled to a 19-month low against the US dollar. This devaluation has incentivized Brazilian coffee producers to increase export sales, exerting downward pressure on coffee prices.

Additionally, forecasts predicting rain in Brazil’s coffee-growing regions have eased drought concerns, further weighing on coffee prices. Earlier this week, coffee prices had surged to two-week highs due to fears that prolonged dry conditions would negatively impact Brazil’s coffee crops. Notably, Somar Meteorologia reported that Brazil’s Minas Gerais region, which produces approximately 30% of the country’s arabica coffee, received no rainfall for the third consecutive week.

Global Production and Market Dynamics

Robusta coffee prices remain supported by concerns over excessive dryness in Vietnam, a significant producer of robusta coffee beans. Coffee trader Volcafe recently projected that Vietnam’s 2024/25 robusta coffee crop might drop to 24 million bags, marking a 13-year low due to poor rainfall causing irreversible damage to coffee blossoms. Despite a projected global robusta deficit of 4.6 million bags for 2024/25, this is a reduction from the 9-million-bag deficit seen in 2023/24, marking the fourth consecutive year of robusta shortages.

The USDA’s bi-annual report from last Thursday provided a bearish outlook for coffee prices. The report projected a 4.2% year-on-year increase in global coffee production for 2024/25, totaling 176.235 million bags. This includes a 4.4% rise in arabica production to 99.855 million bags and a 3.9% increase in robusta production to 76.38 million bags. The report also forecasts a 7.7% rise in 2024/25 ending stocks to 25.78 million bags from 23.93 million bags in 2023/24. Specifically, Brazil’s arabica production is expected to grow by 7.3% year-on-year to 48.2 million bags due to higher yields and expanded planted acreage.

The pace of Brazil’s coffee harvest has accelerated, contributing to the bearish sentiment in the market. Safras & Mercado reported that Brazil’s 2024/25 coffee harvest was 44% completed by June 18, surpassing last year’s 39% completion rate and the 5-year average of 40%.

Inventory Levels and Export Trends

Rising inventories of ICE-monitored coffee further add to the downward pressure on prices. ICE-monitored robusta coffee inventories recovered from a record low of 1,958 lots on February 21 to an 11.5-month high of 5,995 lots last Thursday. Similarly, ICE-monitored arabica coffee inventories rebounded from a 24-year low of 224,066 bags on November 30 to a 16-month high of 842,434 bags as of Tuesday.

Vietnam’s tight robusta coffee supplies remain a bullish factor. The Vietnam Coffee Association reported that the country’s coffee production in the 2023/24 crop year would decline by 20% to 1.472 million metric tons (MMT) due to drought conditions. Additionally, Vietnam’s 2023/24 coffee exports are projected to drop by 20% year-on-year to 1.336 MMT. Recent reports from Vietnam’s Customs Department indicated that May coffee exports fell by 47% year-on-year to 79,358 metric tons, the lowest for May since 2009.

Export News and Global Consumption

Recent export data has also influenced market dynamics. Cecafe reported a 90% year-on-year surge in Brazil’s May green coffee exports to 4 million bags. The International Coffee Organization (ICO) reported a 16.8% year-on-year increase in global April coffee exports to 10.24 million bags, with October-April global coffee exports up by 11.1% year-on-year to 80.99 million bags. Brazil’s exporter group Comexim raised its 2023/24 coffee export estimate to 44.9 million bags from 41.5 million bags.

El Nino Impact and ICO Projections

The ongoing El Nino weather event has had a bullish impact on coffee prices by bringing drought conditions to Vietnam’s coffee-growing regions. However, the ICO projected a 5.8% year-on-year increase in 2023/24 global coffee production to 178 million bags due to an exceptional off-biennial crop year. Global coffee consumption is expected to rise by 2.2% year-on-year to 177 million bags, resulting in a 1 million bag surplus.

Conclusion

The interplay of currency fluctuations, weather conditions, production forecasts, and inventory levels continues to shape the coffee market. As the Brazilian real remains weak and weather patterns evolve, stakeholders in the coffee industry must navigate these complexities to optimize their strategies and outcomes.