Is the Bull Market Re-Heating in Coffee?
Today's Idea
With Tuesday's late session price surge, some traders could be signaling that Coffee prices may have finally reached near-term lows. Some traders looking for the recent low of 256.75 in July Coffee to hold may possibly wish to explore selling puts in Coffee futures options with strike prices below this support level. For example, with July Coffee trading at 270.35 as of this writing, June Coffee 235 puts could be sold for about 1.25, or $468.75 per option, not including commissions. The premium received would be the maximum potential gain on the trade, which would be realized at option expiration in mid-May should July Coffee be trading above 235.00.
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Fundamentals
After failing to trade above the $3.00 per pound level back in early March, Coffee futures prices have slumped lately, with the lead month May futures falling nearly 40 cents since the contract highs were made. However, there are some signs that the bulls are starting to get their caffeine fix. Supplies out of Guatemala have been lower than expected, as heavy rainfall has hurt the country's Coffee production. Coffee exports for March were 6% lower than last year's totals, although government officials are still optimistic that exports for the entire 2010-11 marketing year will be above last year's totals. Coffee output in Brazil is expected to be lower in the 2011-12 seasons, as the Coffee production cycle moves to its "off" year. Some traders estimate that Brazil's production will fall by nearly 10 million bags this coming season. Not all of the Coffee supply fundamentals are bullish, as traders anticipate a rebound in Coffee supplies coming out of Columbia, which is recovering from multi-decade lows in Coffee production. With the onset of winter in the southern hemisphere just around the corner, many traders may start to price in a "weather premium" in Coffee prices, as the Brazilian crop faces potentially damaging freezing temperatures.
Technical Notes
Looking at the daily chart for July Coffee, we notice a reversal day on Tuesday when prices made a new near-term low, only to close sharply higher on the session, with only the 20-day moving average acting as resistance from further gains. Notice that trading volume surged on the up-move, which may be confirming that a significant low may now be in place. The 14-day RSI has moved up and is now reading a more neutral 51.60. Should prices close above the 20-day moving average, the next resistance level is seen at the March 21st highs of 283.15. Support is found at Tuesday's low of 256.75.
Mike Zarembski, Senior Commodity Analyst
