Dollar Surge Undermines Arabica Coffee Rally as Global Supply Dynamics Shift

Arabica coffee faced headwinds on Tuesday as a strengthening dollar index erased earlier session gains. March arabica futures settled at a loss of 1.95 points, or -0.55%, while March robusta coffee managed a gain of +62 points, or +1.57%. The divergence between the two coffee varieties reflects divergent supply outlooks and regional production challenges.

Supply Constraints Drive Market Volatility

The coffee market is caught between competing forces. On one hand, production constraints in key regions are lending support. Brazil’s largest arabica-growing region, Minas Gerais, received only 11.1 mm of rain during the week ending December 26—just 17% of historical averages—raising crop concerns. More severely, Indonesia faces unprecedented flooding that threatens to slash the country’s coffee exports by as much as 15% during the 2025-26 season, according to the Association of Indonesian Coffee Exporters and Industry. Northern Sumatra’s arabica farms have been particularly hard hit, with approximately one-third of the region’s capacity affected.

These weather-related disruptions have created tighter conditions in exchange-monitored coffee stockpiles. Arabica inventories on ICE hit a 1.75-year low of 398,645 bags on November 20, though they rebounded to 456,477 bags by last Wednesday. Robusta inventories similarly dipped to a 1-year low of 4,012 lots in mid-December before recovering to 4,278 lots.

Offsetting Headwinds from Rising Production

Yet production gains elsewhere are creating countervailing pressure. Brazil’s crop forecasting agency Conab raised its 2025 production estimate to 56.54 million bags in December, up 2.4% from September projections of 55.20 million bags. More significantly, Vietnam—the world’s largest robusta producer—is experiencing a production surge. Vietnam’s November coffee exports jumped 39% year-over-year to 88,000 MT, while January-November shipments climbed 14.8% year-over-year to 1.398 MMT. Vietnam’s 2025/26 output is projected at 1.76 MMT (29.4 million bags), representing a 4-year high and a 6% increase year-over-year. The Vietnam Coffee and Cocoa Association has indicated potential for a 10% production boost if weather remains favorable.

Global Production and Inventory Outlook

The broader supply picture remains constructive for producers but challenging for prices. The USDA’s Foreign Agriculture Service forecasted in December that global coffee production in 2025/26 will reach 178.848 million bags, a record and a 2% year-over-year increase. However, arabica production is expected to decline 4.7% to 95.515 million bags, while robusta surges 10.9% to 83.333 million bags. Brazil’s production is projected to slip 3.1% year-over-year to 63 million bags, while Vietnam’s output is forecast to rise 6.2% year-over-year to 30.8 million bags.

Ending stocks for 2025/26 are projected to fall 5.4% to 20.148 million bags from 21.307 million bags in 2024/25, suggesting some moderation in global supplies, though abundance elsewhere continues to weigh on sentiment.

Currency and Demand Headwinds

Beyond supply dynamics, the dollar index’s surge to 1-week highs triggered long liquidations across coffee futures markets. Additionally, demand signals remain mixed. US purchases of Brazilian arabica from August through October—when tariffs were elevated—plummeted 52% year-over-year to 983,970 bags compared to the same period in 2024. Though tariffs have since been reduced, US coffee inventories remain constrained, potentially limiting near-term import growth.

The International Coffee Organization reported in November that global coffee exports for the current marketing year (October-September) edged down 0.3% year-over-year to 138.658 million bags, underscoring modest demand pressures amid ample supplies.

Coffee prices remain trapped between structural supply tightness in select origins and abundant production forecasts globally, with currency movements acting as a critical near-term determinant of direction.