Hot Dry Weather In Brazil Catches Coffee Bears Snoozing
Today’s Spotlight Market
The most recent Commitment of Traders report shows trend-following traders were holding an overall net-short position in Arabica Coffee futures of just over 15,000 contracts as of January 28th. This was just prior to the explosive price rally seen the past few trading sessions, and it appears that the huge increase in price volatility can be attributed to these large speculative accounts being caught on the wrong side of the market. Commercial traders were also net-short prior to the rally, which might be limiting the enthusiasm for further hedge selling, at least until it appears that the speculative buying has run its course. ?
Fundamentals
As many long-time futures traders will attest to, the Arabica Coffee futures market can see price moves become quite volatile, especially if weather conditions in the growing regions of South America become unfavorable — particularly in Brazil, which is the world?s largest Coffee producer.? Well, the weather gods were not kind to the major Brazilian Coffee growing region in January, as rainfall totals were the smallest in nearly 8 years, with few signs for any immediate relief from current hot, dry weather conditions.
The dour weather forecasts have caused many Coffee traders to abandon hopes of a 60 million bag Brazilian crop and a global Coffee surplus, with talks now of a potential global Coffee deficit, especially if the Brazilian government?s estimate of a below 50 million bag crop proves accurate.
This potentially dramatic change in the supply picture for Coffee this coming year has generated a huge buying frenzy in the futures market, with the lead month March contract rallying over 24 cents per pound in just 6 trading sessions, as bears are forced out of their short positions. With prices rising almost 20% in just a few trading sessions and the daily charts becoming parabolic, we may begin to see some hedge selling enter the market, especially if prices continue to rise.?
Some producers may wish to take advantage of the price rally to move physical Coffee to market, especially with the value of the Brazilian Real vs, the U.S. Dollar near 5-year lows. A weak Real would likely induce Brazilian holders of commodities that are traded in Dollars to increase sales, as producers would receive more Reals once the currency conversion takes place.
Although the market does appear overbought in the near-term, especially given the huge percentage move in just a few trading days, we must remember that even at current price levels, the market is still trading well below recent highs.? Should trend-following traders not only close out the current net-short position, but reverse and move to a net-long stance, the bullish Coffee run could get the needed ?jolt? to move even higher!??????????? ?
Technical Notes? -? View Today’s Chart
Looking at the daily chart for March Coffee, we cannot help but notice the ?parabolic? price move the past several trading sessions, as prices rallied well over 20 cents per pound! On Tuesday, it appears that some more aggressive selling has finally come into the market, just prior to prices testing the 140.00 price area. Prices are now well above both the 20 and 200-day moving averages, with recent trading volume running well above recent averages.
The 14-day RSI has moved well into overbought territory, with a current reading of 76.78. 138.00 is seen as the next resistance level for the March contract, with little in the way of more formidable technical resistance until prices move above 150.00. Support is now found near the January 7th high of 122.60.?
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