02-05-2010: March Coffee: Supply Problems Emerging... Sometime in the Future?
What we perceive to be happening is an abundance of fundamental news items which support higher coffee prices coupled with chart action the other way. This does not appear to be a period where news is "fitted" to whatever the market does. So why is the "market" ignoring supply problems on the horizon coupled with increased demand for coffee? Why especially is the market zeroing in on increased demand for lower grades of coffee that meet the commodities contract specifications but do not come under the heading of "premium gourmet" coffees from Colombia and Central America? These are obviously more expensive, but the public seems to be settling for standard.
In recent years we have heard all sorts of stories of disease and freezes wiping out the coffee trees in Brazil. Yet the number of trees we see today rivals record numbers. Brazil often attempts to downplay the amount of coffee and orange juice it intends to or is able to export, then "surprises" the market with crippling amounts that keep prices low. Estimates from Brazil often are not to be trusted and are usually much higher from the USDA.
Right now there is a rather large long position in coffee which could invite a shakeout if coffee prices weaken further and break through resistance levels. Our charts seem to be telling us this will happen. Supply problems are predicted for down the road, although the sources for this are questionable. The question is how far down the road, and how far in advance to commodities prices want to anticipate a rather tight present cash market? We suggest, not very far.
March Coffee:
March Coffee:
Technical action in coffee is weak with focus of attention on potential long liquidation from speculators coupled with a rising U.S. Dollar. Weak outside market forces for commodity prices in general cold spark long liquidation in coffee. Later in the year, a supply issue is expected to develop. Also, the cash market is considered "tight." There are declining coffee stocks at key supplying countries. Daily ICE certified deliverable coffee stocks are down to 2.892 million bags. Stocks are at the lowest level in seven years. Premium coffees from Central America and Colombia are not selling well as buyers move toward the cheaper local exchange grades rather than imports. Japan coffee stocks at the end of December were down for the 4th month in a row to 100,611 tonnes. That's the lowest there since December, 2004. Coffee prices have fallen below a 100-day moving average. On January 21st, a Brazilian agricultural official said the coffee crop there may total only 39 million bags in 2010-2011, due to recent heavy rain. Other estimates from Brazil are as high as 47.3 million bags for the same period. Similar rain problems will affect Colombia according to the Colombian National Coffee Growers Federation, with the current harvest falling to 10.3 million bags or less, down 11.5 million bags from a year ago. The USDA said in December world ending stocks of coffee will fall 6.3 million bags to 34.7 million bags, or 26% of annual use. In September, the International Coffee Organization increased its 2008 world consumption estimate from 128.4 to 130.0 million bags. Billions of coffee bearing trees in Brazil have increased so that 2010 will have the second highest number on record.
210.0I T 2/ 3
I CSCE- Mar-10 Coffee "C", 37500 lbs, c/lb. Cm.=0.08 Lim.= 4.8
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The above point-and-figure chart is giving a conventional sell signal.
We are headed toward a cyclical high and a seasonal down period.
Our best-performing internal program is "Stochast." It is giving a sell signal.
Results of "Stochast" for Coffee (blue lines = successful trades, red, unsuccessful): (Always in the market.)
Our third system has just triggered a buy signal. (Note, disregard the year date on the chart. Our regular readers know this is not a Y2K-compliant system, but it still works.)
The point value is $375. Initial margin on a single contract is $4,158. Use of options
Scale traders are not a factor in this price range.
In the chart below, the yellow line is the futures price, read on the right axis. All other colors are read on the left axis. Red is small speculators. Green is large speculators. Blue is commercials. Large speculators with the best track record are getting increasingly-long.
The average volatility shown below suggests that a current uptrend remains intact from the last volatility low.
Our option trade recommendation is to Sell the Coffee July 145 Call @ 6.75 or better.
What the Mar.- Jul. calendar spread suggests to us is that buying the near contract and selling the far one is at most times not profitable, which we think is a sign that these futures may go down. The best time to enter or leave the above spread is when it is at -2.00 or narrower selling the near as prices are falling and then buying the far, and exiting or entering when it is at -4.00 or wider buying the near as prices are rising and then sellling the far.
Here's an intraday chart for the previous day ( 2/03 ).
Risk Versus Opportunity Report
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KCH0 March Coffee
High Price: 138
Current Price: 133
Low Price: 122
Risk: -0.077
Opportunity: -0.169
(O/R) Ratio = 2.200
Level Table:
| Factors | Weighted Points |
|---|---|
| Parabolic Chart | - 1 |
| Nirvana Chart | + 1 |
| News | + 1 |
| Point & Figure | - 1 |
| Cyclicals | - 1 |
| Seasonals | + 1 |
| Internal System 1 | - 1 |
| Internal System 2 | 0 |
| Third System | - 1 |
| Commitment of Traders | + 1 |
| Historic Range | 0 |
| Range/Volatility | + 1 |
| Level Table | - 1 |
| Other Factors | - 1 |
| Total | - 2 |
Place 7 March Coffee on a Sell Watch with stoploss @ +6.40 above the get-in point.________________________________________________________________________________________________________B.I.
