Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Brazil's coffee crisis pushes Arabica to all-time high
Ole Hansen
Head of Commodity Strategy
Key points in this update:
- Drought and high temperatures, combined with a global reliance on supplies from relatively few regions or countries, are the key drivers behind this year’s top-performing commodities
- Arabica coffee has surged to a fresh record high after Volcafe, a top coffee trader, slashed the 2025/26 production outlook by almost 25%, leading to a fifth consecutive deficit year.
- Coffee is one of the world’s most traded commodities and is often considered the second-most traded by volume, after crude oil.
Drought and high temperatures, combined with a global reliance on supplies from relatively few regions or countries, are the key drivers behind this year’s top-performing commodities. While the cocoa surge earlier this year is showing signs of resuming following a lull, strong gains have also been seen in orange juice and, more recently, coffee, which today has surged through the 1977 record high as Brazil’s production outlook continues to face steep downgrades.
Coffee has so far this year experienced a two-fold rally. In September, robusta coffee, known for its strong, bitter flavour, reached a record high on the ICE-LIFFE futures exchange in London and currently trades up 93% on the year. This followed a challenging growing season in Vietnam, the top producer, where dryness during the growing period was followed by heavy rains at harvest time.
This past month, arabica coffee futures traded in New York—prized for its smoother taste and used in espressos and high-quality products—has surged to, and eventually through, a 47-year high and is currently up 83% year-to-date. Similar to orange juice, concerns over the 2025 crop in Brazil are the main driver. The country experienced its worst drought in 70 years during August and September, followed by heavy rains in October, raising fears that the flowering crop could fail.
Back in June, the USDA forecasted 2024/25 coffee production at 69.9 million (60 kg) bags, comprising 48.2 million bags of arabica and 21.7 million of robusta. However, their latest update this month reduced those figures to 45.4 million and 21 million bags, respectively. The latest run-up in prices was triggered by an update from Volcafe, one of the world’s biggest coffee traders, after a crop tour across Brazil’s key growing areas revealed the severity of the mentioned period of drought.
While the outlook for the current 2024/25 season was more or less in line with the USDA, the 2025/26 outlook was cut by almost 25% to 34.4 million bags of arabica beans, down 11 million bags from a September estimate. If realised, it would, according to Volcafe, put global coffee production on track to fall short of demand by 8.5 million bags in the 2025/26 season, thereby marking a fifth year of deficits.
Coffee is one of the world’s most traded commodities and is often considered the second-most traded by volume, after crude oil. It is a staple beverage for billions of people globally, with demand further boosted in recent years by growing consumption in China. However, production has struggled to meet this rising demand. Like cocoa, coffee is grown in a relatively narrow tropical band, with key producers including Brazil, Vietnam, Colombia, and Ethiopia. This concentration makes it particularly vulnerable to adverse weather conditions, especially in Brazil and Vietnam, which together account for approximately 56% of global production.
Recent commodity articles:
9 Dec 2024: COT Report: Speculators bought crude and gold: euro shorts reach 4-year peak
6 Dec 2024: Commodities weekly: Copper rises on China optimism; OPEC delay signals crude weakness
3 Dec 2024: COT: Mixed week in commodities as dollar buying continued
29 Nov 2024: Commodities take a breather after action-packed November
28 Nov 2024: Coffee surges to a 47-year high
28 Nov 2024: Choppy gold market turns to Santa for December support
27 Nov 2024: Podcast: Will gold enjoy a Santa rally for the eight year in a row?
25 Nov 2024: COT Report: USD long jumps; Mixed week in commodities
22 Nov 2024: Commodity weekly: Strongest performance since April
19 Nov 2024: Gold and silver rise on Russia-US tensions
18 Nov 2024: COT: Limited dollar demand despite strength; Acclerated metals selling
11 Nov 2024: COT: Speculators bought energy and grains, sold gold ahead of elections
8 Nov 2024: Commodity weekly: Mixed response to Trump 2.0
6 Nov 2024: Podcast: US election and the market reactions, including commodities
6 Nov 2024: Trump and Republican victories spark commodity decline
4 Nov 2024: COT: Speculators flock to dollars, exit commodities ahead of US election
1 Nov 2024: Commodity weekly: Some weakness seen ahead of critical week
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