Coffee traders endured the market’s worst month in more than two years in July, as prices fell victim to benign growing conditions in Brazil and scorching temperatures in the U.S. and Europe.
The price of arabica, the premium variety of bean grown mainly in Brazil, slumped 9% to $1 a pound last month on the Intercontinental Exchange in New York, the biggest monthly drop since December 2016. In May, arabica fell to as low as 88 cents, its cheapest price in more than a decade.
Coffee prices have consistently fallen since late 2016 amid booming supply in Brazil and impoverishing farmers in Central America, which has contributed to high levels of migration to the southern U.S. border.
Growers in Brazil, the world’s largest coffee producer, and other countries recently discussed ways they could bolster the market and the incomes of farmers who depend on it.
Driving the current decline is the realization by traders that an outbreak of frost in Brazil left the country’s coffee crop largely unscathed. In late June, worries that a cold snap could do serious damage to coffee crops led to a spike in prices. When it became clear that those concerns were unfounded, traders started to bet that prices would fall again.
Now, funds are building their short bets, or wagers that prices will fall, back up and are “whipping the market down,” said Kona Haque, head of research at commodity trading house ED&F Man.
By Ms. Haque’s estimates, the frost endangered up to 1 million 60-kilogram bags of Brazilian coffee—a fraction of a harvest that the U.S. Department of Agriculture expects to be as large as 59.3 million bags. Such an output would be enormous for what is supposed to be the weaker leg in Brazil’s two-year production cycle. The amount would also be the second-largest crop ever, behind last year’s record 64.8 million bags.
“For now, the market looks a bit grim,” Ms. Haque said, adding that roasters in Europe, Japan and the U.S. don’t buy much coffee during the summer months.
Soaring temperatures in the U.S. and Europe likely added to pressure on prices. As temperatures have reached 100 degrees Fahrenheit in London and New York, said Roger Bradshaw of Soft Commodity Consulting, consumers are likely to have cracked open colder soft drinks in place of their usual lattes and Americanos.
With prices approaching their lowest level in more than a decade, analysts don’t expect them to fall much further.
One source of optimism for coffee growers and investors can be found in the currency market. The Brazilian real strengthened by 1.9% against the dollar in July, partly because the U.S. currency weakened ahead of the Federal Reserve’s interest-rate cut on Wednesday.
The real is expected to rally further as Brazilian President Jair Bolsonaro’s economic reforms make progress through the country’s congress. A stronger real generally boosts the dollar price of coffee on international markets.
Steve Pollard, a coffee analyst at London-based brokerage Marex Spectron, expects prices to rise to more sustainable levels for farmers in Central America. He said growers in Honduras and Nicaragua are skimping on fertilizer, and that prices will have to recover to between $1.15 and $1.20 a pound to incentivize them to keep producing.
Still, there are other longer-term forces weighing on coffee prices. Mr. Bradshaw points to disappointing demand in China, where coffee imports have grown over the past decade but not as fast as many traders had hoped.
The USDA forecasts that China will import 2.9 million bags of coffee in the 2019-2020 season, down from 3.53 million in the 2016-to-2017 season. Chinese imports are also dwarfed by the roughly 27 million bags the U.S. is expected to buy from abroad.
—Pat Minczeski contributed to this article.
Write to Joe Wallace at Joe.Wallace@wsj.com
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