Hot Coffee!
Today's Idea
With Coffee futures prices flirting with all-time highs, some traders leaning towards bullish trading strategies may wish to explore selling bull put spreads in Coffee options. For example, with July Coffee trading at 305.35 as of this writing, the July Coffee 285 puts could be sold and the July Coffee 270 puts bought for about 2.40 points or $900.00 per spread, not including commissions. The premium received would be the maximum potential gain on the trade and would be realized at option expiration in June should July Coffee be trading above 285.00. Risk management is essential in any short options strategy, and some traders may wish to close out the trade before expiration should the spread premium trade at 2 ½ times the premium received for selling the spread originally.
Fundamentals
Your daily cup of java is getting more expensive, as Coffee futures prices have eclipsed the $3 per pound level for the first time since the 1997 bull market, when prices peaked at 318.00 per pound before falling over 50% in a few short months. Strong demand for Arabica Coffee and lower expected production this coming year are the main reasons behind the rally. This coming season is the "off" year for Arabica production in Brazil, which is expected to keep supplies tight. In addition, traders are looking for smaller crops out of Central America, which would add further pressure for the end--users to attempt to obtain inventory for later this year. Coffee roasters may get caught short in the months ahead, as many have kept Coffee inventories at lower levels due to high prices. Now that it appears that they may need to bid-up prices to obtain high quality supplies, as producers are holding inventories awaiting even higher prices. Some analysts don't expect the supply tightness to be alleviated anytime soon, with some talk that it will not be until September or October before fresh inventories will be seen. High prices for lower quality Robusta Coffee are keeping some roasters from tapping inventories here as well. The record highs for Arabica Coffee futures were made back in 1977, when prices reached an unthinkable $3.37 per pound. Given the potential for a large Coffee deficit, this record has the potential to be eclipsed in the coming months. If so, the Coffee futures market can take its place alongside of Gold, Cotton and Corn futures as markets reaching all-time high prices in 2011.
Technical Notes
Looking at the daily chart for July Coffee, we notice prices rising on decreasing volume during the past several sessions, even as prices have risen to 14-year highs. The 14-day RSI is nearing, but has not yet reached, overbought territory, with a current reading of 68.92. The most recent Commitment of Traders report shows large non-commercial traders holding a net-long position of 35,379 contracts as of April 26th. Though this is a large long position being held by speculators, it is far from the record of 61,628 contracts held back in early 2008. With the moves to a 14-year high, we may now see additional buying emerge from trend-following traders as each new high is reached. The high of 318.00 made back in 1997 looks to be the next major resistance level for July Coffee, with support found at the recent low of 286.85.
Mike Zarembski, Senior Commodity Analyst
