Are Traders Reheating the Coffee Market?
Fundamentals
Coffee traders must like thrill rides, as futures prices have resembled a roller coaster the past few months. The latest uphill climb for Coffee prices has the December futures trading at one-month highs, as the Brazilian government announced a price support program for Coffee that will allow the government to purchase up to 10 million bags of Coffee in 2009 and 2010. This is being done to allow producers to gain needed funds without forcing large sales of Coffee to the market once the harvest begins. It will also allow the Brazilian government to increase its Coffee stockpiles, which can be used to supply the market during the cyclical down years in crop production. The beginning of fall in the Northern Hemisphere is also the start of increased coffee demand, as roasters obtain supplies for the coming winter months. A weak U.S. Dollar, especially vs. the Brazilian Real, is also a supporting factor in the Coffee futures market. Speculators are only modestly net-long Coffee futures according to the most recent Commitment of Traders report. Combined, both large and small speculators are holding a net-long position of 6,934 contracts as of September 8th. This relatively small position leaves room for additional buying by momentum traders should the uptrend continue. Hedge selling by South American producers could also be a bit light going into the harvest due to the Brazilian government support program.
Trading Ideas
Given relatively supportive fundamentals in the Coffee market recently, some traders may wish to explore bullish trading strategies in Coffee futures. One such strategy is to buy bull call spreads. An example of this trade would be buying December 140 calls and selling December 160 calls. With December Coffee trading at 136.20, the spread could be purchased for about 4.60 points, or $1725 per spread before commissions. The premium paid is the maximum risk on the trade, with a potential profit of $7500 minus the premium paid should December Coffee be trading above 160.00 at the option's expiration in November.
Technicals
Looking at the daily chart for December Coffee, we notice we are on in the middle of the third uptrend since prices broke out of a consolidation pattern in Late April. However, the latest price movement has made higher lows and lower highs so far, which may signal that we may be in the middle of much longer period of price consolidation. For the short-term, prices remain well above both the 20 and 100-day moving averages,which currently favors the bull camp. The 14-day RSI is strong, with a current reading of 66.41. The August 10th high of 141.65 is the next major resistance point for December Coffee, with support found at the 100-day moving average, currently near the 129.20 area.
Mike Zarembski, Senior Commodity Analyst
