Global Coffee Supply Squeeze Sends Market Signals: What Price Action Tells Us

Coffee prices staged a modest rebound Tuesday, with March arabica climbing +2.55 (+0.70%) and January robusta gaining +10 (+0.24%), though the recovery paled against Monday’s losses. The price action reflects a market caught between bullish and bearish crosscurrents—a classic commodity tug-of-war between tightening supplies and expanding production forecasts.

Drought in Brazil Lifts Coffee Price Support

Brazil’s drought conditions provided the primary catalyst for Tuesday’s price bounce. Minas Gerais, home to the world’s largest arabica coffee production zone, recorded just 11mm of rainfall in the week ending December 5—a mere 17% of historical norms according to Somar Meteorologia. Below-average precipitation typically signals stress on the arabica crop, creating natural price support.

However, the Brazilian real’s weakness told a different story. The currency hit a 1.75-month low against the dollar, encouraging local producers to accelerate export sales and capping the price upside. This dynamic illustrates a fundamental reality: coffee price movements aren’t driven by single factors but by competing supply and currency dynamics.

Production Forecasts Paint a Bearish Picture

The longer-term outlook presents headwinds for coffee price sustainability. Brazil’s crop forecasting agency Conab raised its 2025 coffee production estimate by 2.4% to 56.54 million bags, signaling robust harvests ahead. Vietnam, the world’s largest robusta producer, reported November exports jumped 39% year-over-year to 88,000 MT, with January-November shipments up 14.8% to 1.398 MMT.

Looking further ahead, the USDA’s Foreign Agriculture Service projects world coffee production in 2025/26 will reach 178.68 million bags—a record high. Vietnam alone is expected to produce 31 million bags in 2025/26, a 6.9% increase, representing a 4-year peak. These supply projections create structural pressure on coffee prices.

Inventory Dynamics: Mixed Signals

ICE arabica inventories hit a 1.75-year low of 398,645 bags on November 20, though they recovered to 426,523 bags by last Friday—still indicating constrained supply availability. ICE robusta inventories fell to an 11.5-month low of 4,018 lots Tuesday, suggesting tighter physical markets for the lower-grade variety.

These inventory metrics matter because they represent actual trading liquidity. When warehouses empty faster than production replenishes them, it typically supports price floors—explaining why coffee prices found buyers despite bearish supply forecasts.

Trade Policy Shifts and EU Deforestation Rules

US tariff policies added another layer to coffee price dynamics. During Trump’s tariff regime (August-October), US purchases of Brazilian coffee plunged 52% year-over-year to just 983,970 bags. With tariffs since lifted, American demand for Brazilian coffee could rebound, though inventory rebuilding typically takes time.

The European Parliament’s November 26 approval of a 1-year delay to the EU Deforestation Regulation (EUDR) proved bearish for coffee prices. The reprieve allows continued coffee imports from regions experiencing deforestation in Africa, Indonesia, and South America, effectively boosting available supply into European markets and offsetting supply concerns.

The Broader Context: When Supply Meets Demand

Global coffee exports for the current marketing year (October-September) fell just 0.3% year-over-year to 138.658 million bags according to the International Coffee Organization, suggesting remarkably stable trade flows despite production volatility. The USDA projects ending stocks for 2025/26 will climb 4.9% to 22.819 million bags—a reversal from tight conditions.

The coffee price picture remains conflicted: physical tightness in warehouses and Brazilian drought conditions provide near-term support, while massive production forecasts and strong export flows from Vietnam create medium-term headwinds. For traders, Tuesday’s rebound signals that supply concerns retain some power to move coffee prices upward, even as longer-term production trends argue for caution.