Latest / The Commodities Economy with Fexingo: Oil, Gold, Wheat, and Raw Material Markets / Coffee Prices Surge as Robusta Supply Squeeze Hits Global Roasters
Transcript
- Lucas: Coffee is having a moment. Front-month arabica futures on ICE just hit two hundred and fifty-seven cents a pound, up four and a half percent in the last five trading days alone. The five-day gain for robusta is even steeper — up over seven percent. And this isn't a one-week blip; arabica has rallied about twenty-eight percent since the start of May. Luna: That's a huge move for a soft commodity. What's driving it? I know the macro backdrop has been rough for most commodities — crude is down seven percent in the same five-day window, gold is sliding — but coffee seems to be bucking the trend completely. Lucas: Exactly. And the divergence is striking. You've got WTI crude at eighty-four dollars, down seven percent in a week. Gold at four thousand two hundred fifteen, down nearly three percent. Even natural gas is slipping. But coffee is roaring, and the reason is almost entirely on the supply side. Luna: Let me guess — Vietnam? The robusta drought story we've been hearing whispers about for months. Lucas: That's the core of it. Vietnam is the world's largest robusta producer, accounting for about forty percent of global robusta output. The country has been in the grip of a severe drought since early 2025, and the 2025-2026 harvest, which just wrapped up, came in significantly below expectations. The Vietnam Coffee Association recently estimated output at just over one point six million metric tons, down about fifteen percent from the prior year. Luna: Fifteen percent is a massive supply shock for a commodity that doesn't have a lot of spare capacity elsewhere. And robusta isn't just some niche bean — it's what goes into instant coffee, espresso blends, and a lot of commercial-grade roasts. Lucas: Right. Robusta has historically been the workhorse bean — higher caffeine, more bitter, cheaper than arabica. But over the past decade, roasters — especially in Europe and Asia — have been blending more robusta into their espresso and even drip coffee to manage costs. That means a robusta shortage ripples through the entire coffee supply chain. Nestlé, which owns Nescafé, and JDE Peet's, which owns brands like Jacobs and Douwe Egberts, are the two biggest buyers of robusta globally. They've both publicly said they're struggling to secure enough supply at reasonable prices. Luna: And we're already seeing that translate to consumer prices. I was at the supermarket yesterday and noticed the store-brand instant coffee had jumped about ten percent from last month. That's not just inflation — that's this specific supply squeeze. Lucas: Absolutely. And the thing is, the robusta shortage is also pulling up arabica prices. Arabica and robusta are substitutes to some degree — if robusta gets too expensive, roasters could theoretically switch to arabica, but that's limited because arabica is more expensive to begin with and has its own supply concerns. Brazil, the largest arabica producer, had a decent harvest last year, but there's growing anxiety about the next season because of El Niño patterns moving into the second half of 2026. Luna: So we could be looking at a multi-year coffee bull market. That's a big shift for a commodity that spent most of the 2010s in a glut. Lucas: It could be. The market is certainly pricing in that risk. The Commodity Futures Trading Commission's latest Commitments of Traders report shows that money managers — hedge funds and other speculators — have built up a net long position in arabica futures of over sixty thousand contracts, the highest in nearly three years. They're betting this isn't a temporary spike. Luna: That's a lot of speculative money. But it also makes the market vulnerable to a sharp reversal if supply conditions improve suddenly. Remember what happened to cocoa last year when a big harvest in West Africa wiped out the rally. Lucas: Right, cocoa crashed after hitting records. Coffee could face a similar fate if Vietnam gets good rains in the coming months. The rainy season typically starts in May, but so far in 2026, rainfall in the Central Highlands — Vietnam's main coffee-growing region — has been below average. If that changes, the 2026-2027 crop could rebound, and hedge funds would rush for the exits. Luna: But that's a big 'if'. In the meantime, roasters are getting squeezed. And we're already starting to see some of them pass on costs. Starbucks hasn't raised prices yet this year, but they've signaled they might. That would be a big deal for consumer sentiment, especially with inflation still sticky. Lucas: Speaking of how this show connects to the broader economy — you know, we spend a lot of time digging into these commodity stories because they really do affect everyday life, from your morning coffee to the gas in your car. And we deliberately don't run ads on these episodes. If you want to support that choice, the link is buy me a coffee dot com slash fexingo. Luna: Yeah, it's a small way to keep this independent and ad-free. We really appreciate the listeners who chip in. Lucas: Alright, back to the coffee crisis. Another angle worth watching is the impact on producing countries. Vietnam's economy is heavily dependent on coffee exports — it's the second-largest foreign exchange earner after rice. A drought-hit harvest hurts farmers and rural communities. The Vietnamese government has been trying to diversify into other crops like durian and pepper, but coffee is still king in the Central Highlands. Luna: And the higher prices don't necessarily help the farmers if they have less volume to sell. Plus, input costs — fertilizer, fuel — have gone up, so their margins might not improve much even with prices at multi-year highs. Lucas: Exactly. The World Bank's coffee price index, which is a weighted average of arabica and robusta, is up about thirty percent year-to-date. But the share of that that actually reaches smallholder farmers in Vietnam or Indonesia is often less than half, because of middlemen, processing costs, and export taxes. Luna: Let's zoom out for a second. We've talked about supply, but is there any demand factor here? Are we drinking more coffee globally? Lucas: Demand has been growing steadily at about one to two percent per year, driven by emerging markets — China, India, and Southeast Asia. In China, coffee consumption has been growing at double-digit rates for the past five years, though off a low base. But demand growth isn't the story right now. It's all about supply. Luna: And to bring it back to the broader commodity picture: while coffee rallies, crude is getting hammered. What's the explanation for that divergence? Is it purely about supply shocks in coffee versus macro fears hitting oil? Lucas: I think that's a big part of it. Oil is being dragged down by concerns about global demand — the IMF recently downgraded its growth forecast for 2026, and the U.S. economy is showing signs of slowing. Plus, there's the Iran deal story. The headlines this morning say a deal could be signed in the coming days, which would add more Iranian crude to the market. That's why Brent is trading below eighty-seven dollars, down seven percent in a week. Luna: So coffee is a pure supply-side story, oil is a macro demand story. And gold? It's down nearly three percent in five days, which is unusual given the geopolitical uncertainty — the Iran deal talks, the Swiss population cap vote, all that. Lucas: Gold is interesting. It's been under pressure from rising real yields — the ten-year TIPS yield has crept up to about one point nine percent. And the dollar has been firm. But gold also had an incredible run earlier this year, hitting an all-time high above forty-five hundred. A correction was overdue. The question is whether this is a healthy pullback or the start of a bigger reversal. Luna: Alright, let's go back to coffee for the final stretch. Given the supply squeeze, where do you see prices heading in the next six months? Is two hundred eighty cents possible? Lucas: It's possible. The most bullish analysts — like those at Rabobank — have a target of three hundred cents for arabica by year-end if the Vietnam drought persists and Brazil's next harvest disappoints. But there are a lot of moving parts. Weather forecasts for the next few weeks will be critical. If the monsoon arrives on time in Vietnam, we could see a sharp pullback. I'd say the risk is tilted to the upside for now, but with high volatility. Luna: And for consumers, what's the bottom line? Should we stock up on coffee beans now? Lucas: I wouldn't panic-buy, but if you see your favorite roast on sale, it might not be a bad idea to grab an extra bag. Roasters are likely to raise prices in the coming months, and those increases will show up on supermarket shelves by early fall. Your morning cup could get fifty cents to a dollar more expensive. Luna: Good to know. I'll keep an eye on the weather in Vietnam. Thanks, Lucas. Lucas: Thanks, Luna. That's it for this episode of The Commodities Economy. We'll be back tomorrow with another angle on the raw materials driving our world.