Brazil's Drought and Currency Surge Push Arabica Coffee to 4-Week Peak as Global Supply Outlook Clouds the Rally

Arabica coffee futures are experiencing a significant rally today, with March contracts climbing 13.30 points to reach a 4-week high, reflecting a +3.70% gain. Robusta coffee has also moved higher, posting a +1.61% advance. The dual strength across coffee varieties masks an underlying tension in the market: while immediate weather concerns and currency dynamics are fueling the current upside, longer-term production forecasts threaten to cap further gains.

Weather Pressure and the Real’s Strength Drive Near-Term Arabica Support

The primary catalyst for arabica’s surge stems from Brazil, which produces roughly 35% of the world’s arabica supply. Minas Gerais, Brazil’s principal arabica-growing region, received only 47.9 mm of rainfall in the week through January 2—a 33% shortfall against historical norms according to Somar Meteorologia. Drier-than-expected conditions in a major growing area typically tighten supply expectations, providing fundamental support to prices.

Adding to the upward pressure, the Brazilian real has strengthened to a 1-month high against the US dollar. A stronger real discourages Brazilian coffee producers from accelerating export sales, as their revenues in local currency terms remain attractive even at lower dollar-denominated prices. This dynamic naturally constrains near-term supply flowing to international markets.

Inventory Tightness Across Both Varieties Signals Price Support

Exchange-monitored inventory levels tell a supportive story for coffee bulls. Arabica stocks monitored by ICE fell to a 1.75-year low of 398,645 bags in mid-November before recovering slightly to 456,477 bags by late December. Robusta inventories similarly bottomed at a 1-year low of 4,012 lots on December 10 and rebounded modestly to 4,278 lots by late December. While these levels have stabilized somewhat, they remain historically constrained, limiting the buffer available to meet unexpected demand spikes.

The Supply Headwind: Production Forecasts Threaten Price Ceiling

However, behind this price rally lurks a more bearish longer-term narrative driven by expanding global coffee production capacity. Brazil’s crop forecasting agency Conab raised its 2025 production estimate by 2.4% to 56.54 million bags, signaling ample availability despite current dryness. More significantly, the USDA’s Foreign Agriculture Service projects Brazil’s 2025/26 output will total 63 million bags, suggesting a production base that can eventually overwhelm current inventory constraints.

Vietnam, as the world’s leading robusta producer, compounds this supply picture. The nation’s 2025 coffee exports surged 17.5% year-over-year to 1.58 million metric tons, while production for 2025/26 is forecast to climb 6% to reach 29.4 million bags—a 4-year high. The Vietnam Coffee and Cocoa Association indicated that output could run 10% above the prior year if favorable weather persists, further highlighting the production growth trajectory.

Global Context: Record Production Meets Modest Demand

On a worldwide basis, the USDA projects 2025/26 global coffee production will reach a record 178.848 million bags, up 2.0% year-over-year. While arabica production is expected to decline 4.7% to 95.515 million bags, robusta is poised to surge 10.9% to 83.333 million bags. These diverging trends mean that while immediate arabica tightness supports March contracts, the broader market will receive significant robusta supply expansion in the coming months.

Ending global coffee stocks for 2025/26 are forecasted to contract 5.4% to 20.148 million bags, indicating some modest tightening from current levels. Yet this projection follows record production, suggesting that despite inventory reductions, absolute supply levels will remain elevated.

The Trade-Off: Near-Term Bullish Catalysts Colliding with Medium-Term Supply Expansion

The current arabica coffee rally reflects the classic commodities dynamic: immediate supply concerns and favorable currency positioning are overriding longer-term production expectations. As Brazilian real strength discourages exports and drought keeps near-term availability uncertain, price support is likely to persist. However, investors should remain cognizant that once Brazil’s weather stabilizes and producers resume normal export rhythms, the weight of record global production forecasts could reassert downward pressure on values. The challenge for arabica prices will be sustaining this 4-week high once the initial weather premium and currency advantage fade from focus.