Last fall I wrote about the possibility for a correctional bounce in arabica coffee after a nine-month-long bear trend that took the price of coffee down around $1.00/pound. That little correction turned out to be a major turning point for coffee, setting off a bull trend that more than doubled the front-month contract price by March.
When coffee analysts and traders were unanimously bearish (including yours truly) last November, it marked a major bottom. Weather served as the main agent of change, as is often the case with agricultural commodities. The major growing regions of Brazil experienced a serious drought at the beginning of the year, setting off a dramatic and swift rise that may well run coffee to $4 or higher.
In just a month, talk of another year of oversupply has turned to one of scarcity.
After hitting almost $2.10/pound, coffee experienced a near perfect Fibonacci correction to its 68.1% retracement level. Some recent rains and some choice comments from Starbucks CEO Howard Shultz in Reuters where he said the market “significantly overreacted,” to the Brazil drought news helped knock down the price. And just last week Starbucks announced the reduction of some retail coffee prices. Ironically, the May arabica coffee contract shot up more than five percent on Friday (the day the Starbucks pricing news hit the press) breaking out of its two-week-old consolidation pattern.
According to analysts, there was nothing fundamentally noteworthy to precipitate the advance, arguing that the jury is still out on the level of crop damage in Brazil.
Will the breakout on Friday I’m willing to take a chance and go long, placing my stop below the March low. However, for this one I’ll be looking at the iPath DJ-UBS Coffee Subindex ($JO). The volatility can be extreme during coffee weather events and I’ll be better able to manage my risk…I hope. Coffee opens hours before the stock market and price action can lead to big gaps.