Jan 27 / Laleska Moda

Arbitrage between arabica and robusta increases as prices rise

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  • Coffee prices continue to fluctuate, driven by shifting macroeconomic conditions and concerns over tight global supplies, especially in Brazil. The March 2025 Arabica contract surged back to 350 c/lb level on Monday.

  • In addition to concerns about the 25/26 crop in Brazil, sales of the 24/25 crop are high and above the average for recent harvest years, which is likely to limit the supply of Brazilian grains at least until the start of the new season.

  • This scenario has also led to an increase in Brazilian coffee differentials, given low global stocks of the bean and limited supply from other origins.

  • Despite tight supplies of both Arabica and Robusta, prices for the first have risen more sharply, leading to increased arbitrage between futures contracts for the two coffees. This scenario could contribute to an increase in demand for Robusta over Arabica in the coming months.

Arbitrage between arabica and robusta increases as prices rise

The coffee market has rallied in recent days, reflecting supply-related factors but also the changing global macroeconomic scenario. The start of Trump's second term last week has been in the spotlight, with a correction in the dollar index in recent days due to a softer stance on US trade tariffs than the market had expected. This has also led to a reaction in emerging market currencies, as in the case of the Brazilian real, which has also been affected by the inflow of foreign capital and the higher than expected inflation data (4.36%) in Brazil. This move also provided support for commodities.

In addition, supply concerns amidst strong demand continue to make the coffee market more volatile, with the March/25 Arabica contract reaching a new record of 355,5 c/lb during Monday's session, although it closed at 349,2 c/lb.

It's worth remembering that while Vietnam is expected to contribute to robusta supplies in the first half of the year, producers have been selling grain more slowly this season, especially as the Chinese lunar year approaches. On the Arabica side, harvesting in Colombia and Central America is expected to continue over the next few weeks, but volumes are also more limited. Producers in Brazil are also showing little interest in new sales.

Brazil: Arabica Farmer Selling (% do total)

Source: Safras & Mercado, Hedgepoint

Brazil: Conilon Farmer Selling (% do total)

Source: Safras & Mercado, Hedgepoint

Data released last week on the sales of the 24/25 crop in Brazil reinforces this trend and shows that carryover stocks are more limited. For Arabica, around 82% of the 24/25 crop had been sold by December, while for Robusta the figure was 91%. As for the 25/26 crop, consultancy Safras & Mercado points out that sales in Brazil are still below average at around 12%, compared with 19% in 2024 and 21% on a 5-year average.

It's interesting to note that Brazilian prices have risen on the international market since the end of last year, due to demand and limited supply. Arabica and conilon differentials are at high levels, above the 5-year average. In the case of conilon, the rise was significant last week, just as Vietnamese producers reported a reduction in supply.

On the other hand, despite this recent strengthening in demand for conilon, the spread between this variety and arabica in Brazil is at its highest level since the end of 2024. This reflects the stronger rise in Arabica prices relative to Robusta, especially after December/24, due to supply concerns.

Brazil: Differential Arabica Fine Cup 17/18 (c/lb)

Source: Safras & Mercado, Hedgepoint

Brazil: Differential Conilon 13 up (USD/Mt)

Source: Safras & Mercado, Hedgepoint

Spreads between the price of type 6 good cup Arabica and Conilon 13 up, and of Arabica 600 defects against Conilon 7/8, are even higher than the average for the last 5 years, indicating a widening of the price gap between the two.

Despite the recent support for conilon, given the possibility of a reduced 25/26 arabica crop, the recent decline in ICE certified stocks of the variety and an expected recovery of conilon in Brazil in the next cycle, the trend is for the spread to continue at higher levels than seen in 2024.A wider spread between Arabica and Conilon, particularly at lower grades such as 600 def and 7/8, could mean an increase in the use of Conilon coffee in domestic consumer blends. Previously, when it was trading even higher than Arabica, Brazilian roasters reduced its use in favor of Arabica. This trend was also expected in other parts of the world.

However, with the recent change in fundamentals, we expect Brazilian roasters to demand more conilon this year. Globally, the wider arbitrage between Arabica and Robusta may also incentivize the expansion of Robusta in Asian markets, given its use in soluble coffees and consumer preference in this region - with the exception of China, which favors Arabica consumption.

Brazil: Spread Arabica Good Cup type 6 x Conilon 13 up (BRL/bag)

Source: Safras & Mercado, Hedgepoint

Brazil: Spread Arabica 600 def x Conilon 7/8 (BRL/bag)

Source: Safras & Mercado, Hedgepoint

In Summary

Although there have been some changes in the macroeconomic scenario in recent days, the fundamentals continue to point to a tighter supply of coffee in the coming months, which has maintained high volatility and record prices in the sector. Despite the expected increase in supply in the short term with the harvest of various origins, low global stocks and the high volume of sales of the Brazilian 24/25 crop have provided support for prices, particularly in Brazil where the differentials of Arabica and Robusta increased. The above-average selling of recent crop in the country could limit the volume of Brazilian grains on the market in the coming months.

On the other hand, it is interesting to note that the arbitrage between Arabica and Robusta is widening again, with the spreads between the two coffees in Brazil again above average, especially for the lower grades. With this shift, robusta/conilon coffee is expected to be more in demand again in 2025, especially given the prospect of a limited supply of arabica in Brazil in 25/26.

Weekly Report — Coffee

Written by Laleska Moda

laleska.moda@hedgepointglobal.com

Reviewed by Ignacio Espinola
ignacio.espinola@hedgepointglobal.com
www.hedgepointglobal.com

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