Coffee prices for Arabica, a popular variety, are dropping, providing an opportunity for bears to cash in. Key levels to consider before selling:
## Coffee Futures: Selling Opportunity Amidst Global Weather Challenges
The global coffee market has been impacted significantly by adverse weather conditions in key regions, particularly Vietnam and Brazil.
Vietnam, the world's largest robusta producer, experienced a 20% year-on-year decline in output during the 2023/24 crop year, resulting in a smaller harvest in four years. This was due to drought, causing exports to drop by 17.1% year-on-year for 2024. In contrast, Brazil, the leading arabica producer, projects only a modest 0.5% annual output increase for 2025/26.
Brazil has faced challenges such as extreme weather events like wildfires and flooding, but recent months have seen reduced frost risk compared to previous years, providing some relief for producers. However, Brazil's May green coffee exports fell sharply by 36% year-on-year, which would typically support higher prices.
Global supply expectations remain mixed. The USDA forecasts a 2.5% year-on-year increase in world coffee production for 2025/26, reaching a record 178.68 million bags, with robusta production in Vietnam expected to rebound by almost 7% year-on-year in 2025/26. Arabica production in Brazil is also expected to grow slightly, but recent drought in Vietnam and export reductions in Brazil create countervailing pressures.
Coffee futures prices have declined over the past two months, reflecting an improved supply outlook and rising ICE-monitored inventories. Arabica prices, after peaking at $4.30 per pound earlier, have dropped to $2.80, while robusta declined from $2.75 to $1.73 per pound. This downward trend is partly due to perceptions of plentiful supply, despite weather disruptions in Vietnam and export fluctuations in Brazil.
For December coffee futures (KCZ25), the current outlook leans bearish due to rising global inventory levels and expectations of record production. However, the market remains sensitive to adverse weather developments. A bullish case would emerge if weather forecasts for Brazil or Vietnam turn negative before harvest, potentially creating a floor for prices and a possible rebound in futures.
Traders should remain alert to short-term downward pressure but also to potential, weather-driven price spikes. The growing frequency of extreme weather events, especially in Brazil and other key regions, increases the risk of sudden supply shocks, which could lead to sharp price spikes. It is crucial for traders to monitor weather forecasts, USDA reports, and ICE inventory data closely.
Investors should be aware that trading commodity futures and options is volatile, complex, and risky. Individuals should understand their exposure to risk and other aspects of trading by thoroughly reviewing the risk disclosure documents provided by their broker. All information and data in this article are for informational purposes only. This article does not constitute investment advice or recommendations. It is up to the reader to decide when and if to initiate trades and to determine the size of any trades they may initiate.
*Please note that any trades discussed in this article are hypothetical in nature. The article does not reflect the current or future performance of any investment and should not be relied upon as a prediction, forecast, or guarantee of any particular outcome.
[1] USDA (2023). World Agricultural Supply and Demand Estimates for Coffee. [Online] Available at: https://www.usda.gov/oce/commodity/wasde/wasde-full-report.pdf [2] Reuters (2023). Vietnam coffee exports fall in May as production hit by drought. [Online] Available at: https://www.reuters.com/business/vietnam-coffee-exports-fall-may-production-hit-drought-2023-06-01/ [3] Bloomberg (2023). Brazil May Coffee Exports Fall 36% on Drought, Floods, and Frost. [Online] Available at: https://www.bloomberg.com/news/articles/2023-06-01/brazil-may-coffee-exports-fall-36-on-drought-floods-and-frost [4] CFTC (2023). Commodity Futures Trading Commission Risk Disclosure Statement. [Online] Available at: https://www.cftc.gov/MarketReports/DisciplinaryActions/index.htm
- In light of the declining coffee output in Vietnam and the fluctuating exports in Brazil, investors might consider employing strategies in the finance sector, such as investing in coffee futures, to capitalize on potential price increases due to weather-related supply disruptions.
- As global coffee production expectations remain mixed, with the USDA forecasting a record high of 178.68 million bags for 2025/26, yet countervailing pressures persisting due to weather-driven production issues in key regions, traders should stay vigilant and closely monitor weather forecasts, USDA reports, and ICE inventory data for any signs of adverse weather events that could lead to short-term price spikes in the coffee futures market.
