Brazilian Real Rally Triggers Short Squeeze in Coffee Futures as Supply Concerns Mount

Coffee futures markets experienced a sharp reversal on Friday as short covering in coffee surged following strength in the Brazilian real. The March arabica contract settled +8.55 points (+2.45%), while March robusta closed up +5 points (+0.13%), marking a decisive recovery from earlier weakness. The real’s rally to a 2-week high against the dollar created urgency for traders holding short positions, as a stronger currency makes Brazilian coffee less attractive for foreign buyers at current pricing levels.

Supply Disruptions Fuel Coffee Quotes Rally

Multiple supply-side challenges are supporting the broader coffee market. Severe flooding across Indonesia has impacted roughly one-third of the nation’s arabica coffee farms in northern Sumatra, threatening to slash the country’s coffee exports by up to 15% during the 2025-26 season. As the world’s third-largest robusta producer, Indonesia’s weather woes carry significant weight for global robusta coffee quotes and pricing dynamics.

Brazil’s arabica heartland also faces pressure. The country’s largest coffee region, Minas Gerais, received only 11.1 mm of rain during the week ended December 26—representing just 17% of historical averages. This moisture deficit adds to existing crop concerns that already provided market support earlier in the week.

Tightening Inventory Backdrop

ICE coffee inventories tell a supportive story for prices. Arabica stocks fell to a 1.75-year low of 398,645 bags on November 20, though they recovered somewhat to 456,477 bags last Wednesday—still indicating constrained availability. Robusta inventory similarly reflects tightness, having plunged to a 1-year low of 4,012 lots on December 10 before recovering to a 4-week high of 4,278 lots last week. These inventory levels remain historically compressed, providing a bullish foundation.

Mixed Production Signals Cloud the Outlook

While the near-term setup supports coffee prices amid supply disruptions, longer-term production data presents a more complicated picture. Brazil raised its 2025 coffee production forecast by 2.4% to 56.54 million bags in December, suggesting adequate supplies ahead. However, USDA projections for 2025/26 show global arabica output falling 4.7% to 95.515 million bags, even as robusta production climbs 10.9% to 83.333 million bags.

Vietnam, the world’s largest robusta producer, is driving much of the output growth. The country’s November coffee exports surged 39% year-over-year to 88,000 MT, with January-November shipments up 14.8% year-over-year to 1.398 MMT. Vietnam’s 2025/26 production is projected to reach a 4-year high of 30.8 million bags, up 6.2% year-over-year, indicating robust robusta availability will likely pressure coffee quotes in coming months.

Tariff Relief Supports US Demand Recovery

American coffee consumption patterns reveal another dynamic at play. US purchases of Brazilian coffee from August through October dropped 52% year-over-year to 983,970 bags when Trump-era tariffs were active. With those duties subsequently reduced, US coffee inventories remain tight despite improved price competitiveness, suggesting underlying demand strength once tariffs normalized.

The Bottom Line

The coffee market is caught between competing forces. Near-term short covering, supply disruptions in Indonesia, and tight ICE inventories support near-term coffee quotes. However, expanding production in Vietnam and adequate forecasts from Brazil suggest ample supplies entering the 2025/26 season. The International Coffee Organization reported October-September global coffee exports fell 0.3% year-over-year to 138.658 million bags, while USDA projects world coffee production rising 2.0% year-over-year to a record 178.848 million bags. Traders navigating coffee futures should monitor both the immediate supply shocks and the structural production growth ahead.