This is an update to the article I wrote in May about coffee. At the time, coffee was trading around 1.30 and we were looking for continued weakness to the 120-122 area, and our target was hit as coffee made a 4 year low at 121.10. The coffee market now needs to make a decision, does it break below 120 and move to 113 or have we seen the lows and now coffee heads back up? Only time will tell, but we will be paying very close attention.
Brazil’s harvest is under way and it looks to be far above average. Coffee producers across Central and South America are having record harvests. For the consumer, this is good because coffee consumption will be cheaper. The problem lies in the producers. The price of coffee has dropped 58% over the past 2 years and is getting to the point that they cannot make money; in other words, the producers are selling coffee at the price of production. This has led many producers not to plant new trees and to use some of their plantations for other uses like raising cattle. If this continues, and we get past harvest this year, coffee prices may begin to head higher as the coffee market looks to next year’s crop.
Historically (seasonally) coffee has a tendency to have a slight rally from the middle of August into the first part of September, pulls back into the middle of October, and then rallies into the end of the year. Knowing this, we could still see some weakness through the month of July and then the shorting of coffee maybe over for a while.
The chart below is a weekly chart of coffee futures with a 3, 21, 65 SMA. Notice the 21 period average is at 137.64 and the 65 period average is at 155.47. These are the big areas to watch on the upside. Coffee is having difficulty getting back above 130 in the short term, and if it does, this could lead us up to 137. If coffee breaks below 120 on a closing basis, is should move to the 113-115 area. July coffee futures roll on 6/19/2013 (first notice date is 6/20/2013) and we will be watching the September contract. The next contract is December. I tell you this because July is a delivery month and September is a delivery month based on the current harvest. These contracts will be the weak contracts with the December contract being stronger if the scenario plays out for the reduced production for next year’s crop. Happy Trading!