Coffee Outlook for October - December 2015 : Coffee was the number one, best-performing commodity of 2014, registering gains of 43.19% last year. Therefore, it should come as no surprise that coffee has had a rough time in 2015. During Q1, coffee fell by 20.23%; however, the action in Q2 was more sedate. In Q3, Arabica coffee beans traded on the Intercontinental Exchange lost 8.35% of value and are now 27.16% lower in the first nine months of 2015. Active month December coffee futures closed on September 30 at $1.2135 per pound. The price range over the first six months of this year was $1.1305 on the lows to $1.8740 on the highs.
A drought in Brazil, the world's largest grower and exporter of the commodity, caused last year's rally. Brazil typically supplies around one-third of the world's coffee beans. Coffee moved lower during Q1, as rains in Brazil were beneficial to this year's crop. The selling continued during the third quarter, perhaps due to a weaker Brazilian currency. El Nino could offer some exciting prospects for coffee bulls like me in coming months, particularly since the price is currently low and not far from long-term support levels. Coffee is fast approaching the lows we saw at the beginning of 2014 before it doubled in value in an intense rally. Open interest in coffee futures has increased over Q3. Open interest stood at 174,382 contracts at the end of Q2 and was 194,475 at the end of Q3 - an increase of 11.52%. The increase in open interest could mean that speculative shorts and hedgers have increased activity; however, lower prices accompanied by higher open interest is generally a bearish technical signal.
There is a great inverse correlation between the price of Starbucks' (NASDAQ:SBUX) stock and the price of coffee futures. A lower coffee price has continued the rally in SBUX. The stock closed Q2 at $53.62 per share and rallied by 6% to close at $56.84 on the last day of the third quarter, just $2.48 below the 52-week high in the stock. Lower coffee prices mean a lower cost of goods sold for SBUX, thus increasing profits for the company. Short-term support for December coffee futures now is at the $1.1305 level, with resistance at around $1.4260 per pound. Key support is at the November 2013 lows of $1.0095 per pound.
Coffee Outlook for October - December 2015
Coffee is a wild ride. It is one of the most volatile commodities that trades; daily trading ranges of 8% are the norm rather than the exception. Demand for coffee around the world continues to grow with population and the growing number of coffee shops like Starbucks and imitators around the globe. In Asia, the traditionally tea drinking population has been adopting coffee as a preferred substitute, which has increased global demand. Weather patterns as well as crop disease (leaf rust) in major growing regions will determine price direction of this soft commodity. Like in sugar, El Nino could be just what coffee needs to ignite its price once again. I expect coffee will move higher as fears of a strong El Nino this year will bring buying into the market.
The futures curve in coffee is in a healthy contango, with deferred contracts trading at a premium to nearby contracts telling us that there are presently ample supplies available. In a bear market for most commodity prices since 2011, coffee still stands out as a potential bull based on growing demand and weather considerations. I believe that the current price level offers limited downside risk and the potential of explosive upside action. Coffee is not a trading vehicle for the faint of heart given its penchant for extreme volatility on a daily basis, but risk-reward favors long positions at this time. I am a scaled-down buyer of coffee futures under current levels on the active month ICE futures contract.
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