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 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.
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.
Another important feature supporting prices has been producer behaviour. Following two years of historically elevated prices, many coffee and cocoa farmers are entering this season in a stronger financial position than during previous cycles. Rather than selling immediately after harvest, producers have shown greater willingness to delay sales while waiting for potentially higher prices.
This has reduced nearby physical availability at a time when exchange inventories have also been declining. ICE-certified Arabica coffee inventories fell to their lowest level in more than two years during June, reinforcing concerns about immediate supply availability.
Against this backdrop, speculative investors who had previously exited the market have returned, helping accelerate the recovery through fresh buying and short covering.
Unlike cocoa and coffee, sugar prices remain closely linked to developments in the energy market. Last month's correction was partly driven by falling crude oil prices, which reduced the profitability of producing ethanol from sugarcane. Lower ethanol margins typically encourage Brazilian mills to maximise sugar production, increasing export availability and weighing on prices.
That relationship has since shifted. As crude oil prices stabilised but gasoline prices remained elevated, ethanol became more attractive again, prompting mills to redirect a larger share of cane toward biofuel production. The share of cane allocated to sugar production dropped from roughly 50% to around 41%, tightening physical sugar supplies and, together with the weather challenges, supporting the recent price recovery.
Looking further ahead, the developing El Niño outlook adds a significant layer of uncertainty. Besides Brazil, forecasters are increasingly monitoring rainfall prospects across India and Thailand, the world's second and third largest sugar exporters. Should drier conditions emerge later this year, expectations for another global surplus could quickly disappear.
The recent rally illustrates how rapidly soft commodity markets can transition from oversupply concerns to renewed scarcity fears. While the sharp rebound may leave prices vulnerable to bouts of profit-taking, the underlying weather risks remain unresolved. Harvest progress in Brazil, flowering conditions later this year, West African cocoa development and Asian monsoon performance will all play an important role in determining whether the recent recovery develops into a more sustained move or proves to be another weather-driven spike in what remains one of the commodity sector's most volatile segments.
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