?Bearish Traders Sing “The Coffee Song”
? Fundamentals
For those readers who are not big fans of Frank Sinatra, “The Coffee Song” is occasionally known by its more famous verse “They’ve Got an Awful Lot of Coffee in Brazil”. This refrain is accurately portraying the fundamental situation in the Coffee futures market, with large old-crop supplies from Brazil and Vietnam currently overshadowing potential supply issues from Central America this season.
An outbreak of Roya Fungus or (leaf rust) is plaguing Coffee producers from Mexico and throughout Central America which accounts for about 20% of global Arabica Coffee production. Some parts of this region may see up to 50% of the crop affected as the damage spreads to the south.
However, global Coffee production for the 2012-13 season is expected to have increased to 144.5 million bags according to the International Coffee Organization (ICO). This rise in production was attributed to only a modest production decline from Brazil during the down year of the two-year production cycle.
Though it appears that the market should be well supplied with Coffee in 2013, longer-term prospects are uncertain especially if Central American growers are unable to get a handle on the spread of this destructive fungus.
?? Technical Notes
Looking at the daily chart for May Coffee, we notice that it appears that the nearly 2-year long bear market is still alive and well as a short-covering rally that occurred in mid-January, ran into strong selling pressure as the market attempted to test the 160.00 price level. What we may be seeing is the formation of a consolidation pattern with prices trading within a relatively narrow range between 160.00 on the upside and 145.00 on the downside.
The 14-day RSI is neutral to weak, with a current reading of 40.20. The large increase in trading volume seen on the chart is most likely the rolling of March positions into the May futures ahead of First Notice Day on February 20th. Support for May Coffee is seen at the recent lows of 144.60, with resistance found at the highs made on the most recent short-covering rally at 160.60.
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