Soft commodities rebound as weather risks and supply fears return

Key Points:

• Cocoa and Arabica coffee have rallied strongly from last month's lows supported by adverse weather, tightening physical supplies and renewed weather concerns in the months ahead 
• Heavy rainfall across Brazil has delayed both coffee and sugar harvests, while renewed concerns about a potential strong El Niño threaten production prospects well into the 2026/27 season.
• Sugar has recovered around 10% after an ethanol-driven correction, with Brazilian mills once again diverting more cane towards biofuel production as energy prices stabilised.
• Despite the recent rebound, weather developments in Brazil, West Africa, India and Thailand are likely to remain the dominant price driver during the months ahead.
  

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The soft commodities sector has staged an impressive recovery over the past few weeks, with cocoa gaining around 34% while Arabica coffee futures have rebounded by around 29% from their June lows, while raw sugar has recovered around 10% after suffering a sharp correction as lower energy costs reduced the ethanol demand focus. The turnaround highlights how quickly sentiment can shift in agricultural markets where production is highly concentrated in certain geographical areas, inventories remain relatively tight, and weather continues to dictate the balance between surplus and shortage.

The rally follows several months of heavy liquidation as improving production expectations and easing geopolitical concerns encouraged investors to reduce exposure. However, a combination of adverse weather, renewed supply concerns and fresh speculative buying has rapidly changed the narrative.

Brazil's weather disrupts coffee and sugar

Brazil sits at the centre of the recent price recovery. The world's largest producer of both Arabica coffee and sugar has experienced exceptionally heavy rainfall during what is normally the peak harvest period.

For coffee, this has resulted in the harvest progress slowing as saturated fields prevented machinery and workers from accessing plantations across key producing regions such as Minas Gerais. By late June, only about 33% of the Arabica crop was harvested, compared to over 42% at the same time last year. Besides delaying harvest activity, prolonged wet conditions also increase the risk of lower bean quality, raising concerns about the availability of premium washed Arabica supplies during the months ahead.

The same rainfall has simultaneously disrupted Brazil's sugarcane harvest. Industry data has already pointed to a sharp decline in sugar output as mills struggled to maintain normal crushing activity while harvesting operations were interrupted by muddy field conditions. The combination has temporarily tightened physical supplies at precisely the time when seasonal availability would normally be increasing. In addition, the looming threat of the "Super El Niño" pattern has led to forecasters wiping out their previous expectations of a massive global sugar surplus, with predictions now pointing to a flat market or even a deficit for the 2026/27 season. 

El Niño returns to the market's attention

While current weather has disrupted this year's harvest, investors are increasingly looking towards the 2026/27 growing season. Meteorological agencies have recently increased the probability of a so-called "Super El Niño" event developing later this year, reviving concerns across several major soft commodity markets.

For cocoa, the risk centres on West Africa, where Ivory Coast and Ghana account for around 60% of global production. El Niño historically brings hotter and drier conditions across the region, and early reports suggesting weaker development of young cocoa pods have already prompted traders to reassess production expectations ahead of the important autumn crop.

Coffee faces a different but equally important risk. Attention has shifted towards Brazil's next flowering season when adequate spring rainfall will determine next year's production potential. Should El Niño disrupt these rains, concerns could quickly shift from temporary harvest delays towards a more structural supply shortfall. The weather premium that largely disappeared during the earlier parts of the year has therefore returned to prices.