Why Arabica Coffee is Heading Higher…Much Higher

The darling of this year’s commodity markets, arabica coffee, which at one point reached a return of 90% since the start of the year, has been taking a beating lately. On Friday, the July 14’ ICE coffee (KC) contract experienced its biggest one-day drop since 2011 of more than five percent, this after jumping 12 cents higher Thursday following Brazil’s Confab bureau announcement which cut the total coffee production estimate to 44.7 million bags.

The volatility has been wild in the past few months to say the least and it will probably continue, especially as the long-awaited harvest reports from Brazil start trickling in later this month.  If these initial reports come in more positive than expected, we can expect coffee to keep grinding lower in the short term.

Looking at the July 14’ coffee chart, major resistance sits at the March low of 166. If that breaks, the technical momentum could quickly end this bull market faster than it started. Yet I believe the reality of the dwindling supply situation will reassert the bullish trend and push prices back well above 200.

Did coffee double top or is this a pause in the long-term bull trend?

Did coffee double top or is this a pause in the long-term bull trend?

But don’t take my word for it.

Judith Ganes-Chase, a long-time soft commodities analyst, told Agrimoney.com last week “In all my 30 years of covering commodities, I have not seen anything like this before” in reference to the supply concerns for coffee. She argues that the remaining estimated stocks for Brazil are not of good export quality, meaning that the supply cushion expected to absorb the drought losses may be worthless to buyers.

If she’s right, we may very well see prices top 300, perhaps even test the all-time high set in 1997. But right now the market is focused on global stocks estimates, with other analysts claiming the Brazil drought is already priced in along with other bullish news including El Nino, roya problems in South America and the replanting of robusta trees in Vietnam.

If you’re a long-term bull like me, sit on the sidelines for now until we can establish another upturn. For the bold, try to ride out the uncertainty with a very wide stop.

The risk is big but the reward could be much, much larger.

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The El Nino Commodity Trading Guide: Watch Out For Wheat

With each passing week it appears the odds are increasing for the weather phenomenon known as “El Nino.” Check that…the odds are increasing for a “Super El Nino.”

Yeah, sounds serious.

The last time we had one of those was in 1997-1998. Forecasters suggest the probability of an El Niño is now above 70%, which I hear is an unusually high probability estimate considering the time of year, hence the “super” talk. Of course, high probability does not mean certainty and especially this early in the year; it could be a repeat of 2012 where in the 11th hour El Nino never materialized.

While we anxiously await the latest Pacific Ocean temperature readings, history tells us that El Nino years can significantly influence commodity prices across the globe. The Wall Street Journal recently came out with a useful infographic on key commodities that often experience price spikes including coffee, wheat, corn and cocoa as well as metals such as copper and nickel. Apparently El Nino usually leads to excessive rains in Chile that can flood copper mines.

Of the list, wheat is the most intriguing. The Chicago wheat contract bottomed out around $6 per bushel in March thanks to healthy worldwide stocks. However, those numbers are being slashed as I type thanks to a combination of winterkill, dry weather and now excessive heat in the main winter wheat growing areas of Texas, Oklahoma and Kansas.

The main winter wheat growing areas of California and the plains are smack in the middle of severe drought areas

The main winter wheat growing areas of California and the plains are experiencing severe droughts

On top of that, the crisis in Ukraine continues unabated, adding even more risk premium to a market that fears unrest will curtail exports and possibly reduce yields. Throw in a dry growing season in Australia, a common occurrence in an El Nino year, and we have another fundamental bullish bit of news to keep the market climbing.

As of this writing, the front-month Chicago wheat contract sits around $7.35 as it continues its bullish price trend off the March lows. It’s still early to start talking about breaking the contract high of $13 per bushel, but the game pieces are in place for that potential.