Are Coffee Prices Consolidating?
Fundamentals
Coffee futures traders have been on a rollercoaster ride since May, with thirty-cent price swings both higher, and now lower the past three months. The ride may be at an end, and a consolidation period may be approaching as fundamentals turn mixed. First up for the bulls, weather forecasts are calling for colder and wetter conditions in the Coffee growing regions of Brazil, the world's largest Coffee producer and exporter. Wet weather, in particular, can hamper the quality of the coffee beans, and any signs of continued wet weather will be closely monitored by traders. The Columbian Coffee crop continues to disappoint, with just 4.24 million bags produced for the beginning of the year through June 30th. If the production trend continues, the country will miss the government's current target of just over 11 million bags. For the bearish camp, the strength in the Brazilian Real vs. the U.S. Dollar has caused Coffee sales to accelerate, with June shipments up over 470,000 bags vs. June 2008. Large speculators have begun to lighten-up on their net long positions in Coffee futures, with the Commitment of Traders report showing large non-commercial traders shedding 4687 net long contracts the week ending July 14th. This puts the large speculative position at 3173 contracts. Commercials during this time have turned to becoming net sellers in the Coffee market, which may accelerate on any short-term rally attempts. Given the mixed arguments as to the direction of Coffee prices, it appears that traders may begin to switch to decaf as the market's volatility begins to wane.
Trading Ideas
If Coffee prices do start to consolidate, some traders may want to consider option strategies that can take advantage of a range-bound market. Since the middle of June, September Coffee prices have not been higher than 126.30 or lower than 113.35. If a trader believes that prices will stay within this range over the next few weeks, they could explore the possibility of selling September Coffee strangles. September Coffee options expire on August 14th, so time decay will work for a short strangle position. An example of this trade is selling the September Coffee 130 calls and selling the September 112.5 puts. With September Coffee trading at 124.70, this strangle could be sold for about 1.50 points, or $562.50 per strangle, not including commissions. Notice that the strike prices are outside of the current price range, and given the potential unlimited risk involved in selling strangles, a trader should closely monitor the position and may possibly want to consider closing out the trade should September Coffee trade at or above the call strike or at or below the put strike.
Technicals
Looking at the daily chart for September Coffee, we notice the price consolidation has taken hold. Daily price swings continue to hover right around the 100-day moving average, which gives neither bulls nor bears the edge. The 14-day RSI is still in neutral territory, with a current reading of 57.12. Resistance is found at the recent highs of 126.30, with support found at 113.35.
Mike Zarembski, Senior Commodity Analyst
