Feb 28 / Laleska Moda

Future prices drop, but weather concerns could cap the correction

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  • After setting a record this month, arabica futures prices sharply fell in the last two weeks of February, coming back to the 370 c/lb levels. Robusta futures also followed the trend.

  • A correction was expected after the expressive rally in early February, especially with the pause in roasters buying, the decrease in the Open Interest for call option and, the recent liquidation of long positions by speculative funds.

  • Besides that, there is an ongoing expectation of negative impact on the demand given current prices, with some of the largest companies in the world pointing to weakens in sales.

  • Despite this bearish look in the short-term, prices could show some reaction again in March, as weather in Brazil starts to raise concerns and overall availability of the bean remain low.

  • A new heatwave is expected to hit key producing regions in early March, while cumulative precipitation in 2025 remains below average levels.

Future prices drop, but weather concerns could cap the correction

Coffee futures have retreated in recent days, back towards the 370 c/lb level, after reaching almost 430 c/lb in mid-February. The correction was somewhat expected given the magnitude of the rally, especially with many roasters withdrawing from the market after the heavy buying in the first half of the month. In addition, the decrease in open interest for call options and, the recent liquidation of long positions by speculative funds also contributed to the correction.

The May/25 contract, the most liquid, hit a three-week low on Wednesday, although it appears that the futures found support at the 61.8% Fibonacci retracement level, and may be heading for a consolidation in the around the 370 and 380 c/lb in the coming days. Despite the recent correction, futures prices are still up a cumulative 20% this year, keeping demand concerns at a core point in the market. Some of the biggest companies in the sector are already signaling these challenges amid rising coffee prices: Keurig Dr Pepper reported a decline in US sales in Q4/2024; JDE Peet's forecast a decline in 2025, despite growth last year. Most companies have also signaled that they will raise prices in the coming months, making coffee even more expensive for consumers and adding to fears of a downturn in demand.

Fibonacci Retracements: NY Arabica 2ºContract (c/lb)

Source: Refinitiv; Hedgepoint

CFTC: Speculative Funds (lots)

Source: CFTC

On the other hand, supply concerns are unlikely to dissipate any time soon and will continue to support prices, especially given the current weather conditions in Brazil. Despite good rainfall at the end of 2024 and in January, February was dominated by dry and hot weather in the Center-South of the country, where the main coffee-growing regions are located.

The regions most affected were once again the Arabica's. In Minas Gerais, the largest producing state, cumulative rainfall in 2025 is already at its lowest level for decades. While this trend has been felt throughout the state, the South of Minas and the Zona da Mata have been the most affected regions. Not only is rainfall low, but average temperatures are also above average, following a series of heat waves in the country.

Minas Gerais (BR): Cumulative Precipitation (mm)

Source: Refinitiv, Hedgepoint

Minas Gerais (BR): Average Temperature (°C)

Source: Refinitiv, Hedgepoint

While São Paulo experienced rainfall in early February, the remaining weeks were drier, with cumulative rainfall in 2025 already at its lowest level in 10 years. As in Minas Gerais, the regions of São Paulo are also experiencing above-average temperatures, which are likely to rise in the coming days as a new heat wave is expected.

São Paulo (BR): Cumulative Precipitation (mm)

Source: Refinitiv, Hedgepoint

São Paulo (BR): Average Temperature (ºC)

Source: Refinitiv, Hedgepoint

It is important to note that this year's weather pattern is similar to that of 2024 (or even more severe), which led to the reduction in processing yields of 24/25. The lack of rain and higher temperatures this time around could affect the final stage of bean filling, resulting in smaller or defective beans. Not only that, but if the weather is too severe, it could also affect the physiology of the plant, especially as we are coming off a couple of years of less-than-ideal weather conditions.

In this sense, while it is too early to predict whether we will indeed have a further negative impact in 25/26 (an already smaller crop on the Arabica side), if a larger volume of rain does not come back in March, we may have to review our estimates once again. As a result, if the weather does not improve, we are likely to see a bounce back in prices, particularly for Arabica contracts, with May/25 likely to return to the 400 c/lb level.

According to Inmet (Brazil's National Meteorological Institute), the current forecast for March indicates lower rainfall in some of the coffee-growing regions, such as Sul de Minas, Zona da Mata Espírito Santo and part of São Paulo. Meanwhile, temperatures are expected to remain above average, which, if proven, could have some impact on coffee production in Brazil. On the other hand, the current higher temperatures could also lead to an early harvest in 25/26.

Brazil: Forecast of Total Precipitation and Precipitation Anomaly in March (mm)

Source: Inmet

Brazil: Forecast of Average Temperature and Temperature Anomaly in March (ºC)

Source: Inmet

In Summary

After reaching record levels at the beginning of February, Arabica futures contracts corrected at the end of the month. This move was expected given the magnitude of the rally earlier in the month and was also supported by a reduction in speculative long positions. However, current weather patterns in Brazil are sounding the alarm for a possible reaction in prices.

Despite good volumes at the beginning of the month, rainfall was lacking in February, bringing 2025 cumulative precipitation in the Arabica producing regions to its lowest level in years. Not only is there is a lack of rain, but temperatures are above average, with another heat wave expected to hit Central-South Brazil in the coming days, raising concerns about its impact on the final phase of the development of the 25/26 crop. If the weather conditions do not improve in March, we are likely to see another rally, especially for the May/25 contract, even if concerns about the impact of coffee prices on demand remain.

Weekly Report — Coffee

Written by Laleska Moda

laleska.moda@hedgepointglobal.com

Reviewed by Carolina França
carolina.franca@hedgepointglobal.com
www.hedgepointglobal.com

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