coffee futures prices today - Potential Coffee prices and Production in 2016 : Coffee's recent price doldrums have as much to do with the global "risk off" vibe as they do with 5 consecutive years of ample Brazilian production. Brazil is by far the world's largest producer and exporter of coffee. Thus developments in the Brazilian crop can have an outsized effect on prices.
But Brazil's "new" coffee crop (2015-16) is currently in it's infancy and is in the midst of it's critical flowering stage. At the beginning of the production cycle, coffee trees develop tiny flowers that eventually drop off leaving a small "cherry." This is what we eventually know as a coffee "bean." How ever many flowers the trees gets determines how many beans we will eventually have.
Poor weather can mean less flowers. Thus weather in the flowering season is critical.
The new volatility and latest price rally has been primarily due to dry weather in Brazilian growing regions causing concerns over flowering.
But October weather rallies are not uncommon coffee. In fact, the increased volatility it brings could present opportunities to take advantage of the continuing, longer term bearish fundamentals in coffee
But Brazil's "new" coffee crop (2015-16) is currently in it's infancy and is in the midst of it's critical flowering stage. At the beginning of the production cycle, coffee trees develop tiny flowers that eventually drop off leaving a small "cherry." This is what we eventually know as a coffee "bean." How ever many flowers the trees gets determines how many beans we will eventually have.
Poor weather can mean less flowers. Thus weather in the flowering season is critical.
The new volatility and latest price rally has been primarily due to dry weather in Brazilian growing regions causing concerns over flowering.
But October weather rallies are not uncommon coffee. In fact, the increased volatility it brings could present opportunities to take advantage of the continuing, longer term bearish fundamentals in coffee
1. Potential Record 2016 Production
Despite dry October weather, the USDA still projects 2015/16 Brazilian coffee production to top 50 million bags. Some early private estimates had some private estimates had the crop hitting a record 60 million bags. Although the recent round of dryness may have tempered that estimate, the year is young and the main growing season has yet to begin. The point is, with ample harvest the last 5 years and another projected for next year, the new crop can lose some yield and still come in more than adequate. Better irrigation, modern pruning techniques and development of new growing areas have served to make coffee production more consistent in Brazil. Bottom line: Unless the weather gets a whole lot worse, expect a big harvest from Brazil in 2016.
Despite dry October weather, the USDA still projects 2015/16 Brazilian coffee production to top 50 million bags. Some early private estimates had some private estimates had the crop hitting a record 60 million bags. Although the recent round of dryness may have tempered that estimate, the year is young and the main growing season has yet to begin. The point is, with ample harvest the last 5 years and another projected for next year, the new crop can lose some yield and still come in more than adequate. Better irrigation, modern pruning techniques and development of new growing areas have served to make coffee production more consistent in Brazil. Bottom line: Unless the weather gets a whole lot worse, expect a big harvest from Brazil in 2016.
Brazil is expected to see another 50+ million bag harvest in 2016. (Note: 2014/15 crop has since been revised down to 45 million bags)
2. The Emergence of Vietnam and Revival of Colombia
In 1992, Vietnam produced just over 2 million bags of Coffee. In 2016, they'll generate over 28 million bags. In the past 2 ½ decades, Vietnam has gone from a bit player in the coffee market to a global powerhouse. Now the second largest coffee producer in the world, Vietnam's emergence has provided a cushion to shortfalls or fears about the Brazilian crop. Colombia's reemergence as a player is a factor as well. Expected to produce 13 million bags of high quality Arabica in 2016, South America's "other" coffee grower would boast the highest production year since 1996.
In 1992, Vietnam produced just over 2 million bags of Coffee. In 2016, they'll generate over 28 million bags. In the past 2 ½ decades, Vietnam has gone from a bit player in the coffee market to a global powerhouse. Now the second largest coffee producer in the world, Vietnam's emergence has provided a cushion to shortfalls or fears about the Brazilian crop. Colombia's reemergence as a player is a factor as well. Expected to produce 13 million bags of high quality Arabica in 2016, South America's "other" coffee grower would boast the highest production year since 1996.
In the last 24 years, Vietnam has emerged as a global coffee powerhouse.
Colombian production has rebounded since newer coffee trees began to replace the trees lost to weather in 2008.
3. The Seasonal Play
Those getting "all bulled up" over dry weather reports from Brazil may want to take a bit of history into account. The fact is, weather is usually dry in Brazil from May thru October. There is usually some kind of dryness concern during flowering. And typically by November or December, ample (often excessive) summer rains begin to fall. Coffee trees have 2nd and 3rd flowerings where yields can often be "made up" from disappointments during October's first. This is why September and October rallies often give way to weaker prices once seasonal rains arrive in November and December (See chart below.) If you've studied our book, you know that seasonal tendencies can play a big role in helping to select high probability options to sell.
Those getting "all bulled up" over dry weather reports from Brazil may want to take a bit of history into account. The fact is, weather is usually dry in Brazil from May thru October. There is usually some kind of dryness concern during flowering. And typically by November or December, ample (often excessive) summer rains begin to fall. Coffee trees have 2nd and 3rd flowerings where yields can often be "made up" from disappointments during October's first. This is why September and October rallies often give way to weaker prices once seasonal rains arrive in November and December (See chart below.) If you've studied our book, you know that seasonal tendencies can play a big role in helping to select high probability options to sell.
Coffee prices have tended to weaken into November and December as the beginning of Brazilian Summer typically brings timely rains.
Conclusion and Strategy
The relentless 2015 downtrend in coffee was interrupted this month by a sudden, albeit limited rally in prices. This was due primarily to dryness in Brazilian growing regions during the pivotal flowering period for the 2016 crop. While markets could swing either way in the coming weeks based on Brazilian weather, volatility in coffee options has surged as a result. The public loves a weather story.
Despite recent dryness, long term fundamentals remain bearish. Without additional weather problems this year, Brazil could potentially produce a record coffee crop in 2016. In addition, Vietnam and Colombia are both expecting bumper crops with Colombia expecting its biggest harvest in 20 years.
Finally, seasonal tendencies favor weakening coffee prices into December as Brazil's summer rainy season arrives.
May 2016 Coffee
The combination of bearish fundamentals and availability of deep out of the money strikes makes selling calls in Coffee a high probability trade right now. But pick your points and sell on market strength, not weakness.
For these reasons, would view an additional weather rallies in coffee prices over the next 30 days as opportunities for shorting the market. Option sellers can look to sell deep out of the money call options. Recent volatility has made strikes 50, 60 even 70% out of the money available.
For these reasons, would view an additional weather rallies in coffee prices over the next 30 days as opportunities for shorting the market. Option sellers can look to sell deep out of the money call options. Recent volatility has made strikes 50, 60 even 70% out of the money available.
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