COFFEE PRICE DRIVERS EXPLAINED

What Drives Global Coffee Prices?

The global coffee market experiences frequent price volatility due to a complex interaction of supply and demand dynamics, weather conditions, geopolitical factors, and macroeconomic movements. As one of the most traded commodities in the world, coffee pricing is influenced by several critical drivers that traders, producers, and consumers monitor carefully.

Three of the most significant factors determining coffee prices today are:

• Production levels in major countries like Brazil and Vietnam;
• Global coffee inventories and their availability;
• Foreign exchange (FX) movements involving key producing nations’ currencies.

This article analyses each of these pricing mechanisms in depth and explains why they matter to coffee market participants.

The Role of Brazil and Vietnam in Coffee Supply

Brazil and Vietnam are by far the most influential producers in the world coffee market. Brazil leads in arabica bean production, while Vietnam dominates the robusta coffee market. Together, these two countries account for over 50% of global coffee supply. Consequently, weather patterns, agricultural policies, and economic stability in these nations have an outsized impact on pricing.

Brazil: As the world’s largest coffee producer and exporter, Brazil’s harvest outcomes can single-handedly tilt the market. The biennial nature of Brazil’s arabica crop leads to alternating years of higher and lower yields. Droughts and frosts, which have become more common due to climate change, can decimate harvests and trigger massive price spikes. For instance, the 2021 frost event in Brazil caused futures prices to surge to highs not witnessed in over a decade.

Vietnam: As the second-largest producer and the top supplier of robusta coffee, Vietnam plays a crucial role in determining the balance between arabica and robusta markets. Robusta tends to be less sensitive to weather shocks but its market is still susceptible to disruptions. Adverse weather, fertiliser shortages, or logistical bottlenecks—common during the COVID-19 pandemic—can lead to reduced shipments and rising prices globally.

Any fluctuations in planting decisions, pest outbreaks, domestic policy changes on exports, and transportation costs can materially alter global trade flows from Brazil and Vietnam, which in turn affects futures price benchmarks like ICE arabica and robusta contracts.

How Coffee Inventories Affect Global Prices

Inventories serve as a crucial buffer between supply and demand in any commodity market. In the case of coffee, the levels of green coffee stocks held in certified warehouses, particularly those under the Intercontinental Exchange (ICE), are closely tracked by analysts, traders, and producers. These inventories reflect market sentiment and influence short- to medium-term price movements.

ICE-Certified Stocks: The amount of coffee stored in ICE warehouses—particularly for arabica beans—is a transparent measure of available supply. When ICE inventories are high, it suggests a surplus, putting downward pressure on prices. Conversely, when inventory levels drop significantly, markets typically perceive that the balance is tightening, thereby raising benchmark prices.

ICE stocks have fluctuated dramatically over the past few years. For example, arabica inventories hit a 23-year low in early 2023, contributing to an uptick in coffee futures amid demand resilience and low replenishment rates. The drawdown was exacerbated by lower shipments from key exporters and stronger global consumption trends as economies normalised from pandemic disruptions.

Private and Origin Inventories: Apart from exchange-monitored inventories, significant quantities of green coffee are held by private firms, roasters, and origin countries. While data on these inventories is less reliable, they can play an important role in certain pricing cycles. For instance, warehousing capacity in Vietnam and Brazil offers some cushioning against export delays, yet when such reserves shrink, panic buying can follow.

Role in Price Volatility: Inventories also condition the coffee market's response to external shocks. A supply disruption, such as shipping congestion or an unexpected adverse weather event, causes sharper price reactions when inventories are already tight. On the other hand, when stocks are flush, the market absorbs disruptions more calmly.

Overall, coffee inventories—although only one part of the supply equation—are a vital metric in projecting near-term prices and gauging fundamental strength or weakness in the market.

The Role of Foreign Exchange in Coffee Pricing

Currency movements exert a powerful influence on agricultural commodity pricing, and coffee is no exception. The majority of global coffee is priced and traded in U.S. dollars, while it is produced and harvested in local currencies—primarily the Brazilian real (BRL) and the Vietnamese dong (VND). This inverse relationship between local currencies and the dollar creates frequent pricing friction.

Brazilian Real (BRL): Since Brazil is the largest coffee supplier, the BRL/USD exchange rate is closely correlated with arabica coffee prices. When the Brazilian real strengthens against the dollar, Brazilian coffee becomes more expensive on international markets, making coffee traders less willing to offer competitive prices. This can drive global coffee prices higher. Conversely, a weaker real lowers the effective cost of coffee exports from Brazil, which can exert downward pressure on futures prices.

For example, in periods of BRL weakness—such as during political instability or when the central bank cuts interest rates—exporters may flood the market to take advantage of robust dollar income, even if global prices are declining. This added supply can moderate international prices or even lead them lower, causing large movements in the futures markets.

Vietnamese Dong (VND): While less influential than the BRL, movements in the VND can still impact robusta markets. Since Vietnam tightly manages its currency, the effect is less pronounced; however, in times of inflation or economic uncertainty, the dong’s devaluation could make Vietnamese robusta exports more competitive, potentially undercutting competitors and lowering global prices.

U.S. Dollar Strength: A broad strengthening of the U.S. dollar, such as during tight Federal Reserve monetary policy cycles, often leads to weaker commodity pricing as it makes dollar-denominated goods expensive for foreign buyers. In coffee, this dynamic can dampen import demand or force large importers to pass on price increases to consumers, reducing consumption growth.

Hedging and Currency Volatility: The presence of significant currency risk also increases hedging costs for major producers and traders. Firms engaged in the import/export trade must frequently manage FX exposure through forward contracts or options, which indirectly affect coffee selling prices and add cost layers that may ultimately find their way into coffee prices at the retail level.

In summary, FX market movements—not only in Brazil and Vietnam but globally—play a pivotal role in shaping coffee pricing by affecting competitiveness, trade flows, exporter behaviour, and global demand.