Large Brazilian Crop Looms, but is it Enough to Sour Coffee Bulls?
Tuesday, September 6, 2011
The fundamental outlook for Coffee remains bullish, despite the expectation for a large crop in Brazil. The spot market remains extremely tight presently, and it may be foolhardy to make trading decisions based on what could be instead of present reality. That being said, traders should keep the immanent Brazilian crop in the back of their minds, and some traders may choose to use options instead of futures. Given the overbought technical outlook, some traders may wish to consider waiting for a pullback in prices to near support in the 275.00 area and enter into a bull call spread. An example of such a spread to consider would be the December 275/300 call spread, limiting traders' risk to the initial cost and reaching maximum profit if the December futures contract closes above $3.
Fundamentals
Coffee futures have rallied straight up since early August, fueled by a very tight physical market. Many traders are beginning to look toward next year's Brazilian crop for forward guidance. If weather conditions hold up, Brazil is expected to produce a record crop in the upcoming year of somewhere just north of 3.75 million metric tons. Traders will closely monitor the flowering over the next month and a half to give them a leg-up on crop health, as the La Nina weather pattern can have a negative impact on flowering. The spot market remains extremely tight, which has been the main catalyst for the sharp rise in prices. Given these high price levels, many producers may be inclined to sell some of their stockpiles, which would alleviate short- term supply pressure. This could, however, be bullish for prices until the new crop comes to harvest.
Technical Notes
Turning to the chart, we see the December Coffee contract moving vertically throughout most of August. The market has not had a meaningful consolidation or correction in that timeframe, suggesting the market could be overbought. The RSI indicator is also giving overbought readings, which could be seen as negative over the short-term. Given the overbought conditions and resistance at 300.00 and 311.60, prices may come back to test support near the 275.00 level. Failure to hold 275.00 may result in a test of the 250.00 level.
Rob Kurzatkowski, Senior Commodity Analyst
