Thursday, August 1, 2013
It looks as though Coffee bulls may have their hopes of a near-term bottom dashed, as prices are approaching relative lows with some momentum. In addition to extremely oversupplied conditions, Coffee may come under pressure from outside markets. It looks as though the US, a major Coffee consumer, may be stalling economically. Furthermore, investor demand for emerging market currencies could wane. Farmers may be tempted to unload Coffee, fearing a declining Real.
Coffee bulls have once again been disappointed by an oversupplied cash market, which may drag prices down once again. Coffee exports from Indonesia's Sumatra region have risen to four-year highs, negating some of the positive momentum from tighter near-term stocks in the region. Exchange inventories were slightly destocked last week on strong Asian cash prices, most notably in Vietnam. This, however, is viewed as a short-term phenomenon, and it would not at all be surprising to see this trend reverse and ICE inventories increase in the coming days. Bulls took another hit from Brazil escaping frost damage in the Parana region, which is set to produce 1.7 million bags of Coffee this year, which is roughly 3.5% of total Brazilian output. Frost was reported, but there was no meaningful damage.
Turning to the chart, we see the September Coffee contract reversing back in mid-July and coming back to test relative lows near the 118.25 level. Prices tested the 50-day moving average no less than three times in recent week, never managing to capture enough momentum to close above the average. Failure to hold near-term support at 118.25 could be selling pressure from speculators. The next support level can be found at relative lows in early 2010 near the 112.00 mark. Currently, the oscillators are giving no clue as to the near-term direction of the market and sit at neutral levels.
Rob Kurzatkowski, Senior Commodity Analyst