Coffee prices have been predicted to rise in 09’on expectations of smaller supplies around the globe being that the 09-10′ harvest is an off year. Demand seems to be inelastic: when coffee prices rise individuals don’t tend to reduce their coffee consumption accordingly and when the prices fall, consumer demand does not seem to increase to any great extent. We’d only suspect a significant reduction in demand if there was a substantial increase in price as consumers seem to be tightening their belts.
As of yesterday’s close the front month contract is trading at $1.04, just above the 50% Fibonacci retracement level, assuming the low in 01′ and the high reached in 08′. Seen in the July Coffee chart below we are trading at the bottom end of a 15 cent trading range that has contained prices for the last 5 months. We are expecting these levels to hold and have been advising clients to start working long July contracts either via futures with option protection or by purchasing 20 cent bull call spreads. On the second chart you can see that if we do see prices start to range higher and get thru the $1.20 level, which failed on the last attempt, there is little in the way of resistance until $1.55/1.65.
Already premiums are being paid in physical markets to levels not seen since June 97′, when coffee futures surged to 20-year highs above $3/lb, see the second chart. Supplies of beans will continue to be under pressure until the next main Latin American coffee harvest starts in October. Coffee has a strong seasonal tendency to peak in May right before the Brazilian harvest, as the market builds in a premium against a potential frost scare. Past performance is not indicative of futures results.
Before the 97′ rally, there was a similar combination of an extended supply squeeze, rapidly shrinking global stocks and growing demand for high-quality beans that sent premiums sharply upward. According to softs analyst Judith Ganes-Chase, who runs J. Ganes Consulting “the situation is more precarious today than it was in 97”. She, like many traders, think it is feasible to see $2/lb at some point if conditions line up correctly.
Although stocks in importing countries are still higher than they were in 97′, stocks in producing countries are currently standing close to 20 million fewer bags than in 97′, according to Ganes-Chase. On top of stocks being tight, world consumption has grown by more than 30 million bags from the 99.3 million bags consumed in 97′ to the 130 million bags forecasted for 09′, according to the ICO. Production is estimated at a maximum of 123 million to 125 million bags.
With supplies coming down and demand still growing, there is little to suggest improvement in the deficit balance. Meanwhile, roasters are reportedly paying up to move their contracts forward, in order to ensure they will have supply later in the year. It’s time to start scaling into coffee with a 3-6 month time frame.
The one negative that needs to be addressed is that the economy has changed from 97′ and with the IMF projecting only a 1-1.5% world growth in 09′, a slowdown in the world economy cannot go unnoticed. For now, coffee remains a staple and consumers may cut other vices first. Being a realist, if circumstances worsen coffee may not stay immune, but in my opinion the worst case we see is the 0.89 cent level holding and that is why we suggest scaling in starting right now. Just imagine if the entire population of tea drinkers in the West starts switching to coffee? Immediate considerations that will affect coffee prices: a sharp move north or south in the US dollar or Brazilian real, the price fluctuations in fertilizer, outside market influence, and weather in growing regions.
It is for these reasons that coffee looks so attractive, on any pullbacks buy dips. To get specific trading strategies on coffee or any other commodities you wish to play contact us at MB Wealth or (888)-920-9997. www.mbwealth.com
July 2009 Coffee Futures
click the chart to enlarge
Front Month Continuation Chart of Coffee
click on the chart to enlarge
MB Wealth Corp. is not responsible and does not endorse anything outside of the content of this article authored by Matthew Bradbard; President of MB Wealth.
Risk Disclosure: The risk of loss in trading commodity futures and options can be substantial. Before trading MB Wealth recommends that you should carefully consider your financial position to determine if commodity trading is appropriate for you. All funds committed should be purely risk capital. Past performance is no guarantee of future trading results. There are no guarantees of market outcome stated, everything stated above are our opinions. Calculations of profit and loss have not factored in commissions and fees.