After reaching a 13-year high at the end of September, coffee prices have lost some momentum over the past few weeks. With a large speculative net long position, coffee prices are highly susceptible to profit-taking and the unwinding of long positions.

Source: Barchart

The Arabica coffee-growing regions of Brazil have experienced drier-than-normal weather over the past few months, which will negatively impact production and support coffee prices. Recent rains have largely alleviated stress on coffee trees, and with Brazil’s Arabica harvest season typically starting in May, their upcoming 2025/26 crop year may avoid major weather-related issues from a potential La Niña event. There is currently a 60% chance of La Niña developing before December.

Colombia’s annual coffee production has continued to recover from the 9.5-year low recorded last August at 10.62 million bags (each bag weighs 60 kg), reaching 12.76 million bags in September. While La Niña may bring above-average rainfall in early 2025, Colombia’s production pace could still improve. As a result, current coffee prices are considered overvalued and may undergo a significant correction during the remainder of this year.

In the final weeks of October 2024, coffee prices also experienced a decline after a period of rapid growth due to the following four factors:

1. Consistent rainfall in Brazil: The rainy season arrived on schedule in Brazil's coffee-growing regions, particularly for robusta and arabica varieties. Heavy rains have improved soil moisture, alleviating drought concerns and stabilizing supply, thereby putting downward pressure on coffee prices.

2. Eased monetary policies: Central banks in the US, Europe, and recently China have cut interest rates, making credit flows easier. This has facilitated coffee trade and supply chain activities, contributing to lower prices.

3. Postponed implementation of the EU’s EUDR law: The EU has delayed the enforcement of its Anti-Deforestation Regulation, allowing coffee of uncertain origin to enter Europe freely. This has reduced the need for stockpiling coffee, leading to an increase in selling pressure and a sharp drop in prices.

4. Pressure from a strong USD and a weak BRL: A stronger USD has raised financing costs for long contracts, forcing investors to liquidate positions. Meanwhile, a weaker BRL has encouraged Brazilian farmers to sell more coffee to maximize returns in local currency terms, increasing supply and exerting downward pressure on coffee prices.

Source: HighTower, The SaigonTimes