Are Traders Reheating the Coffee Market?

09/22/2009 12:01 am EST

Focus: FUTURES

Coffee traders must like thrill rides as futures prices have resembled a roller coaster the past few months. The latest uphill climb for coffee prices has the December futures trading at one-month highs as the Brazilian government announced a price support program for coffee that will allow the government to purchase up to 10 million bags in 2009 and 2010. This is being done to allow producers to gain needed funds without forcing large sales of coffee to the market once the harvest begins. It will also allow the Brazilian government to increase its coffee stockpiles, which can be used to supply the market during the cyclical down years in crop production.

The beginning of fall in the Northern Hemisphere is also the start of increased coffee demand, as roasters obtain supplies for the coming winter months. A weak US dollar, especially versus the Brazilian real, is also a supporting factor in the coffee futures market.

Speculators are only modestly net long coffee futures, according to the most recent Commitment of Traders report. Combined, both large and small speculators are holding a net long position of 6,934 contracts as of September 8. This relatively small position leaves room for additional buying by momentum traders should the uptrend continue. Hedge selling by South American producers could also be a bit light going into the harvest due to the Brazilian government support program. 

Technical Notes

Looking at the daily chart for December coffee, we notice we are on in the middle of the third uptrend since prices broke out of a consolidation pattern in late April.  However, the latest price movement has made higher lows and lower highs so far, which may signal that we may be in the middle of much longer period of price consolidation.  For the short term, prices remain well above both the 20- and 100-day moving averages, which currently favors the bull camp.


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The 14-day RSI is strong, with a current reading of 66.41.

The August 10 high of 141.65 is the next major resistance point for December coffee, with support found at the 100-day moving average, currently near the 129.20 area.

By Mike Zarembski of OptionsXpress.com

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