Coffee prices are perking up!
Fundamentals
Not all commodity markets are suffering from deflation, as Coffee futures made 2-month highs last week. Apparently traders have shifted their focus away from the economic malaise most of the world is experiencing and started to focus on actual market fundamentals. High quality Arabica Coffee is becoming scarce, causing buyers to pay a premium for near-term supplies. The outlook for next season's production from Brazil is bullish, as CONAB is estimating the new-crop between 36.9 and 38.8 million bags vs. 46 million bags produced last year. Analysts attribute much of the production decline estimate to next year's crop being in a "down" year for the production cycle. A lower than anticipated crop out of Columbia has also supported prices, as supplies there remain extremely tight. Looking at the most recent Commitment of Traders report, we notice large non-commercial traders holding a net-short position of nearly 7000 contracts as of January 6th, with the March contract closing well above the 20-day moving average last week and near-term resistance being taken out. It may not take long for trend-following commodity funds to start moving from a net-short position to a net-long one. If so, Coffee prices may continue the uptrend as this fresh buying enters the market.
Technicals
Looking at the daily chart for March Coffee, we notice the large price spike that occurred on Tuesday of last week on extremely high volume. This set the stage for the rally to continue, as short-covering buy stops were triggered and short-term momentum traders moved to a bullish bias. The 14-day RSI has turned positive with a current reading of 59.15. Despite the large up-move last week, prices closed well off their highs on Friday, as light profit-taking by weak bulls and some commercial selling capped the day's gains. The November 10th high of 121.15 is seen as the next resistance point for March Coffee, with support found at the 20-day moving average currently at 111.05.
Mike Zarembski, Senior Commodity Analyst
