Why did coffee prices drop after reaching a 47-year high?
On December 3, 2024, coffee prices on both the London (Robusta) and New York (Arabica) exchanges fell sharply after a series of peak days. The London exchange recorded a sharp drop of nearly 580 USD/ton for Robusta coffee, while the New York exchange also saw a significant drop for Arabica. What is the reason for the drop in coffee prices?
According to analysts, the main reasons for the sharp drop in coffee prices after hitting the peak may include:
1. Impact of Financial Markets and a Weak Brazilian Real
One significant cause is the prolonged liquidation pressure and the weakening of the Brazilian real. The weaker real encourages Brazilian producers to boost exports, increasing supply on the global market. This happens because a depreciated real raises domestic revenue when converted from foreign currencies, motivating producers to sell more and decreasing coffee prices on both exchanges.
Earlier, March Arabica contracts reached record highs, with December contracts hitting their highest levels in 47 years. This triggered a technical correction and profit-taking sentiment, exerting downward pressure on prices.
2. Weather Conditions and Production in Major Producing Countries
Brazil, the world’s largest coffee producer, has been experiencing its driest conditions since 1981. Rainfall levels in Minas Gerais, Brazil’s primary Arabica-growing region, were just 31% of the historical average, negatively affecting the flowering stage of coffee plants and reducing expectations for the 2025/26 crop.
In Vietnam, the largest Robusta producer globally, production for the 2023/24 harvest is projected to decrease by 20%, reaching 1.472 million metric tons, marking a four-year low. Recent prolonged rains have further delayed harvest progress, tightening short-term supply.
3. Supply-Demand Outlook and Conflicting Forecasts
Short-term supply constraints have supported prices. The USDA revised its 2024 Brazilian coffee production forecast to 66.4 million metric tons, down from an earlier estimate of 69.9 million metric tons. Similarly, Conab adjusted its forecast for Brazil’s 2024 crop from 58.8 million bags in May to 54.8 million bags.
In contrast, the International Coffee Organization (ICO) predicts global production will rise 5.8% to a record 178 million bags for the 2023/24 season due to cyclical “off-year” effects. These conflicting forecasts have created market uncertainty.
4. Market Sentiment and Technical Factors
The prior price surge left the market in an overbought state, triggering automatic sell orders as prices began to reverse. This accelerated the sharp decline seen on December 3.
This price correction reflects the market’s adjustment after a significant rally, influenced by a combination of technical, supply-demand, and future expectation factors. Coffee prices are expected to remain highly volatile in the short term, driven by technical trends, speculative activity, and fluctuations in the Brazilian real.
In the long term, adverse weather in Brazil and Vietnam may continue to impact supply, potentially supporting prices. However, higher production in other regions and high inventory levels could lead to a divergence in Robusta and Arabica prices. Continuous monitoring of USDA and ICO reports, as well as global weather patterns, will be crucial for predicting future price trends.
What’s your take on this development?
Sources: Coffeetalk, Trading Economics, USDA, ICO
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