Arabica Coffee's Rally Intensifies Amid Supply Tightness and Currency Volatility

When Supply Meets Weather: The Perfect Storm for Arabica Coffee Prices

Global arabica coffee markets are experiencing notable upward momentum as multiple supply-side pressures converge with unfavorable currency dynamics. The March contract for arabica (KCH26) surged 3.7%, adding 13.30 points to its value, while the March robusta contract (RMH26) gained 1.61%, up 63 points. What’s driving this rally? The answer lies in a combination of weather stress in the world’s top arabica producer and shifting foreign exchange conditions that are reshaping trader behavior.

The immediate price catalyst stems from drier-than-normal conditions across Brazil’s critical coffee-growing regions. In Minas Gerais—the heartland of arabica cultivation—precipitation during the week ending January 2 totaled just 47.9 mm, representing only 67% of the historical average. This weather deficit threatens crop quality and yield prospects, pushing prices to their highest point in four weeks. Simultaneously, a stronger Brazilian real, which recently touched a one-month peak against the US dollar, is creating a natural deterrent for Brazilian exporters. When their currency appreciates, selling coffee at fixed dollar prices becomes less attractive, inadvertently tightening the available supply in global markets.

The Vietnam Factor and Inventory Dynamics

While arabica prices climb, robusta markets tell a different story due to Vietnam’s outsized production capacity. Vietnam, the world’s dominant robusta supplier, reported a 17.5% year-over-year increase in coffee exports for 2025, reaching 1.58 million metric tons. This surge in robusta supply is capping price gains for the lower-grade coffee variety despite broader market support.

Interestingly, inventory levels reveal a nuanced picture. ICE-tracked arabica stocks plummeted to a 1.75-year low of 398,645 bags by November 20, though they recovered partially to 456,477 bags by late December. Robusta inventories similarly hit a one-year low of 4,012 lots on December 10 before rebounding to 4,278 lots by the month’s end. These fluctuations underscore how thin inventories are amplifying price volatility—any production disruption could send prices higher.

The Tariff Aftermath and US Import Constraints

US buyers remain a significant wildcard in the coffee market equation. From August through October, when steep tariffs on Brazilian coffee were in effect, US imports from Brazil cratered by 52% compared to year-ago levels, totaling just 983,970 bags. Although these tariffs have since been reduced, the damage to import flows persists, keeping US coffee inventories lean and supporting prices globally.

Production Forecasts: Brazil Slowing, Vietnam Accelerating

Brazil’s crop outlook has shifted modestly upward. Conab, the country’s crop forecasting agency, raised its 2025 harvest estimate by 2.4% in December, projecting 56.54 million bags versus the prior estimate of 55.20 million bags. However, this represents a slowdown from historical growth patterns, reflecting aging tree stocks and weather pressures.

Vietnam’s trajectory moves in the opposite direction. The country’s 2025/26 coffee output is forecast to expand 6% year-over-year to 1.76 million metric tons, or 29.4 million bags—the highest volume in four years. The Vietnam Coffee and Cocoa Association suggested the harvest could potentially reach 10% above the prior season if weather remains favorable, positioning the country to capture even more global market share.

The Global Supply Picture: Deficits Ahead?

When zooming out to global trends, the International Coffee Organization reported on November 7 that worldwide coffee exports for the current marketing year (October through September) declined 0.3% year-over-year to 138.658 million bags. This contraction, though modest, signals tightening availability in the pipeline.

The USDA’s Foreign Agriculture Service (FAS) painted a more bullish production picture in its December 18 report, forecasting global coffee production for 2025/26 at 178.848 million bags—a record and up 2% annually. However, the composition matters: arabica output is anticipated to fall 4.7% to 95.515 million bags, while robusta production jumps 10.9% to 83.333 million bags. FAS further projects that Brazil’s output will contract 3.1% to 63 million bags, while Vietnam’s supply climbs 6.2% to 30.8 million bags—a four-year peak.

The critical figure lies in ending stocks. Global coffee inventories for 2025/26 are forecast to decline 5.4% to 20.148 million bags from the prior year’s 21.307 million bags. This inventory erosion, combined with arabica’s output decline and geographically concentrated production, sets the stage for sustained arabica coffee price support in the quarters ahead.