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.

Wake Up and Smell the Coffee Bull Market

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.

The May Arabica Coffee Daily Chart Looks Poised For Another Run Higher

The May Arabica Coffee Daily Chart Looks Poised For Another Run Higher

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.

Tuesday Links: The Ultimate Cheat Sheet for Selling Anything

Some items you may find interesting this morning…

Futures Links

Time to buy coffee? Many traders have scalded themselves trying to catch a bull trend (DragonFlyCap)

Fed introducing plans to limit banks’ commodity activities (Bloomberg)

China continues to buy U.S. soybeans despite the looming Brazil harvest (Agriculture.com)

The Vampire Squid calls crop futures a bad bet for 2014 (Agrimoney.com)

WTI crude looking at its worst start to a year since 2009 (Bloomberg)

Sugar stares down a four-year low (Investing.com)

Other Fun Stuff

Did you know that dating to 1990 the S&P 500 has dropped one percent an average of 32 times a year? In 2013 it did so 17 times (Avondale Asset Management)

The ultimate cheat sheet for selling anything (James Altucher)

Tuesday Links: Corn’s 2014 Outlook; Brazil’s Crude Oil Industry Faces Reality

Content you may find interesting on this bone-chilling morning across the USA…

Futures Links

Coffee breaks out (Inside Futures)

World’s largest banks see steady to lower corn prices this year (Agrimoney.com)

Brazil’s crude oil plans hit reality (Washington Post)

ICE cuts its soft commodity trading hours, starting February 3 (WSJ)

Farmer survey suggests smaller North American soybeans, corn crops (Farm Futures)

Other Fun Stuff

CNN Poll finds majority of Americans want to legalize marijuana (CNN)

New Year’s trading resolution: keep it simple, stupid (SMB)

An oath to manage your trading biases (Andrew Grimes)

Tuesday Links: To Taper or Not to Taper? That is the Question…

Howdy y’all, I’m back after two weeks away with a fresh set of links. I was on holiday in Africa and am planning a quick post soon about what I learned about investing while on safari.

But before I get to that, I’m introducing a slight tweak in my daily links. I’ll now be dividing out the commodities/futures specific links with other stuff I find interesting. As this is primarily a futures trading blog, I’m listing the former first.

Let me know if you have any feedback on this new approach or have any other ideas. I love to hear from you.

Thanks for reading!

Futures Links

It is time for a fun bubble in commodities (Financial Times)

Contrarians are getting that shiny look in their eyes for gold (Market Beat)

Arabica coffee jumps to two-month high… of course it does when I’m away (Business Recorder)

The oil market sits around waiting for the Fed taper decision (Investing.com)

Corn can’t break the pressure as GMO concerns and the South American harvest loom (Business Recorder)

Other Fun Stuff

To taper or not to taper? That is the question… (Tim Duy)

A nice list of investing-themed books from 2013 (Reading the Markets)

I look forward to this every year…investments fads and themes 1996-2013 (Reformed Broker)

 

Sunday Links: A Cheat Sheet for Reinvention

Start your week with some topical reading…

Cocoa ends November with longest rally in 11 years (Bloomberg)

SocGen raises its surplus forecast for arabica coffee in 2013-2014 (Agrimoney.com)

Will ethanol mandate changes increase farmer subsidies? (Reuters)

Oil World sees soybeans out of the teens by June (Bloomberg)

Sugar prices may not rebound until next year (Agra Net)

A rundown of all the major economic data releases this week (Calculated Risk)

Has easy money made today’s market analogous to the mid-1980s? (Reformed Broker)

The ultimate cheat sheet for reinventing yourself (James Altucher)

Tuesday Links: Wal-Mart Food Drives for Employees

Coffee farmers in China consider ripping up trees (Watch China Times)

Wages as a percent of the economy are at an all-time low, enter Wal-Mart employee food drives (Business Insider)

Cocoa settles above two-year highs (WSJ)

Dow breaks 16,000 and S&P touches 1,800. It’s business as usual (Reformed Broker)

Add more bearish news to the corn bin: ethanol mandate changes and GMO discovery (Reuters via Business Recorder)

Bitcoin trading is the Wild West (Stocktwits)

Saudi Prince warns of the American natural gas boom’s influence on Saudi Arabia’s economy (CBS News via Pankaj Oswal)