Can Coffee Keep Rolling? A Look at Supply/Demand Fundamentals

Coffee's been one of the hottest commodities on the board to date in 2010 (remember, the broader CRB Index peaked in early January) - can everyone's favorite pick-me-up continue it's run?

The supply/demand fundamentals are very intriguing, writes Julian Murdoch for our friends at Hard Assets Investor.  Coffee demand has doubled in the past 10 years (!) - and farmers can barely keep up.  While they have boosted supply, demand has rocketed up faster - as a result, global coffee stocks sit near all-time lows.

You can read Julian's full coffee supply/demand analysis here (with some excellent charts included).

If you're thinking about going long coffee here - be careful.  Coffee is one of the most volatile commodities you'll see, and can produce some truly nauseating volatility for traders (take it from a guy who's been on the coffee beat for a little while - through both good trades and bad!)

I'd prefer to punt on a coffee position if we see another nasty wave of deflation that kicks the prices of everything to the floor once again.  If that happens, coffee might be one of the first to "perk up" (sorry, couldn't resist!) as people start to find jobs once again when we eventually emerge from this Global Depression.

But let's part ways on a cheery note...and revisit everyone's favorite part of waking up.  From a time when America actually went to work, and unemployment was actually falling, here's a blast from the past...

Coffee Grounds Make Good Biodiesel, Researchers Report

The Economist reports that researchers at the University of Nevada at Reno have found that coffee grounds can be turned into biodiesel that is comparable in quality to top biodiesel on the market today.

Because the biodiesel is made from grounds, no extra land has to be diverted in order to generate the inputs for this type of biodiesel. And if that wasn't green enough for you - the grounds can even be composted after the biodiesel is extracted.

We've discussed before that the long term supply/demand picture for coffee points towards higher prices, and we'll stay tuned to see if biodiesel is able to warp the coffee market that way it was able to send corn up to $8.  I know the process looks green on paper, but never say never, we may get some good crops diverted for biodiesel yet.

Cotton Futures Hit 2009 Low - Weekly Commodities Review

Cotton Futures Hit 2009 Low

Cotton futures slumped to a 2009 low on bearish supply/demand news. Cotton's projected world stocks-to-use ratio hit their highest mark since 2004-2005.

We were stopped out of our position at $0.45, and this one hurt - I hate the idea of selling cotton at these prices - BUT, we always have to respect our stops, no matter how strong the desire to get some of these losses back.


Cotton has been dropping about $0.01 after going "limit down" $0.03 earlier in the week.

Next support for cotton appears to be at $0.41 - we'll continue to watch cotton and see if it retests it's old lows.

Looks like cotton may continue to circle the bowl until demand is able to stage some sort of recovery. I still believe we'll see $1 cotton sooner rather than later, as soon as these stimulus packages begin to take hold. All of this newly printed money will be looking for a home.


Coffee's Rocky Week

Coffee did not fare much better this week. We are holding on to our position right now, with a stop around the 113 mark.


We discussed coffee's long term supply/demand situation last week. We'll soon see if our timing on this trade was appropriate.


Gold Stocks Starting to Catch Some Air

The rally in gold, and gold stocks, continues to look very strong.

Gold set a 100-day high on February 12th at 954.0, and closed Friday at 942.2. While the barbaric relic may be due for a pullback, the chart undoubtedly goes from the "lower left to the upper right", as Dennis Gartman is fond of saying.

Even with gold rallying, gold stocks are following, but somewhat reluctantly. The Gamco Gold fund, where my wife's entire 401K resides, has doubled off its October lows, but is still about 30% below its highs from last spring.

I recently read that last spring's valuation on gold stocks really had $1100 or $1200 priced into them, which may explain why we're not back to that point, even with gold rallying to where it is.

It's also possible that gold stocks are a fantastic bargain right now, and are poised to start doing moonshots when gold takes off. Chris Mayer, my favorite Agora analyst, expects gold stocks to make all-time highs in 2009, partly thanks to lower input costs that will fuel (no pun intended) record earnings.

For more information on gold and gold stocks, I'd recommend checking out some of the articles written by Casey Research and Big Gold editors on our blog, such as this one.

Open positions

Date	Position	Qty	Month/Yr	Contract	Entry Price	Last Price	Profit/Loss
01/16/09	Long	1	MAR 09	Corn	374 3/4	363 1/2	($562.50)
01/20/09	Long	1	MAR 09	Corn	397 1/2	363 1/2	($1,700.00)
02/06/09	Long	1	MAY 09	Coffee 'C'	121.95	114.75	($2,700.00)
Net Profit/Loss On Open Positions							($4,962.50)

Account Balances

Current Cash Balance	$36,354.04
Open Trade Equity	($4,962.50)
Total Equity	$31,391.54
Long Option Value	$0.00
Short Option Value	$0.00
Net Liquidating Value	$31,391.54

---------------------------------------------
Cashed out: $20,000.00
Total value: $51,391.54
Weekly return: -17.1% :(
2009 YTD return: -38.2% :(

Prior year's results:
2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial stake: $2,000.00

(Had to add these historical facts in to keep me from smashing my head into my keyboard).

***"Cash out" mostly means taxes, living expenses, and startup capital for our time management software company that was recently covered by the Sacramento Business Journal and Inc magazine.

Coffee Lower, Still Supported by Supply Concerns

Coffee prices were mixed, although the longer-term outlook for bean values may mean higher prices because of a potential supply crunch.

Source: Reuters

Are Any Grains Worth Buying at These Prices?

Are there any grains worth buying at these prices? Have you seen any article, commentary that may be of help?

This question was posed by our buddy and regular reader/contributor Moyo, who runs the fine commodity focused site FuturesCafe.

I think that sugar, cotton, and coffee are the most attractive agriculture plays at this point. For the simple reason that their prices have not moved up recently - therefore, additional supply has not come on the market. Couple this fact with the further tightening of supply that commodities will experience across the board as a result of the current state of the credit markets, and these, I believe, are good candidate commodities to lead the way up.

Cotton is the most attractive investment opportunity I can see - it is actually trading below the prices it was at when the bull market in commodities began in the first place.

Cotton's price spike in 07-08 was really a speculative phenomena. Traders started piling into cotton futures contracts, as everyone knew cotton was destined for a spike - driven by reduced supply as farmers planted higher priced corn and soybeans in lieu of cotton.

The self-fulfilling prophesy proved to be short-lived, as the market was not able to sustain a rally. But it's coming.

Wheat also may be worth a look here. Corn, rice, and soybeans interest me less, as they are coming off a recent run-up, and have been planted from sea to sea across the world. It may take more time to work off the new supply on the market - though it's possible that prices already reflect this.

BOTTOM LINE: "Ag-flation" is coming again, in a very big way. Agriculture is very attractive at current prices, but I would caution you against being "early" into these trades. Wait for an uptrend - you'll have plenty of time to build up your positions, as commodities, particularly agriculture, are likely to be the first assets to recover in price.

Commodity Research Bureau: Foods and Softs Outlook

Remember when the grains and softs were doing moonshots, and every other column here was about bullish news for food prices? Seems like just yesterday I was imploring a much smaller readership base to sugar me sweet.

While my favorite soft commodities (sugar, coffee, cotton) remain parked on my wish list as we wait for an uptrend, here's a free outlook on cotton, coffee, sugar, cocoa, and OJ from the Commodity Research Bureau.

Looks like sugar production is still outpacing sugar consumption - but what the heck, let's see if we can channel the great sugar bull together:

A Couple Jim Rogers Interviews

Some good recent hits from Jim Rogers:

• The US dollar is in trouble
• Oracle Rogers sees worse recession ahead
  

Says he's currently long the Swiss Franc, Japanese Yen, and airline stocks (as a contrarian play).

Also thinks coffee, cotton, sugar, silver, and zinc look potentially attractive (this is usually Rogers' code for - these are screaming buys).

Jim Rogers: Gov't interventions can't stop commodity bull

“Governments and politicians do not understand markets and they are making the situation worse by trying to impose controls on the markets," Jim Rogers commented in a recent speaking engagement.

• Rogers also expects coffee, sugar, and cotton prices to rise sharply.
• Sees upside for zinc and silver prices
• Has no plans to sell gold
• Intends to unload the rest of his US dollar holdings in this dollar rally
  

My Current Commodity Futures Positions - 9/7/08

Now THAT'S the way you trade!

Two solid weeks in a row - I'm feeling good about things, back in control, following trends like I should be.

A review of my trades from the week that was:

• Closed out my Coffee long position - I closed this out on Thursday just north of the 143 mark, because - well - coffee just didn't feel right. I bought in anticipating a possible breakout - didn't get it - and figured best to close out my position. Much to my immediate chagrin, coffee rallied up above 146 soon after I closed the position. But was down 4.10 yesterday. Coffee is so volatile it's unbelievable. This is truly a "close your eyes and buy" bull market, and I just don't have the stomach or capital for this right now.
  

• Also closed out my Silver long position - Really, I had to come to grips with the fact that I didn't time the bottom properly, that I was dumb for trying, and that I should wait for an uptrend before having a long position in Silver.

• Went long the Japanese Yen -As we discussed earlier in the week, the Yen has held up remarkably well in the face of this dollar rally. We finally got the breakout to the upside I was looking for on Thursday.
  

Other existing positions I've got:

• Short the British Pound - This trade continues to look good - the British Pound has been down basically every single day against the dollar for at least the last month. I'm happy that I closed my eyes and added another short contract last week.
  

My wish list (waiting for an uptrend):

• Sugar
• Cotton
• Coffee
  
• Swiss Franc
• Silver

Open Positions

Date	Position	Qty	Month/Yr	Contract	Entry Price	Last Price	Profit/Loss
08/29/08	Short	1	SEP 08	British Pound	1.8190	1.7654	$3,350.00
08/12/08	Short	1	SEP 08	British Pound	1.9042	1.7654	$8,675.00
09/04/08	Long	1	DEC 08	Japanese Yen	0.9340	0.9339	($12.50)
Net Profit/Loss On Open Positions:							$12,012.50

Account Balances
Current Cash Balance	$50,069.73
Open Trade Equity	$12,012.50
Total Equity	$62,082.23
Long Option Value	$0.00
Short Option Value	$0.00
Net Liquidating Value	$62,082.23

Cashed out: $18,000.00
Total value: $80,082.23

Weekly return: 7.4%
YTD return: 5.0%

***"Cash out" mostly means taxes, but lately I've also been using it to pay down my credit cards a bit. Why credit card debt? I'm financing a startup and trying to outpace my CC interest rate in the futures markets - kids, don't try this at home.

My Current Commodity Futures Positions - 8/31/08

A contemplation on my trades from the week that was:

• Shorted the British Pound (again) - Roll over, Sterling! The trend is my friend, the trend is my friend, the trend...bad economic data keeps on coming from the UK. This move was long overdue.
  

• Went long Coffee - I absolutely DON'T like the way coffee is acting since I took this long position, but I'm in for the long haul - hopefully.

Other existing positions I've got:

• Silver Futures - Same old story - I expect silver and gold to rally strong towards the end of the year.
  

My wish list (waiting for an uptrend):

• Sugar
• Cotton
  
• Swiss Franc
• Japanese Yen
• More silver
• More cowbell

Open Positions

Date	Position	Qty	Month/Yr	Contract	Entry Price	Last Price	Profit/Loss
08/29/08	Short	1	SEP 08	British Pound	1.8190	1.8213	($143.75)
08/12/08	Short	1	SEP 08	British Pound	1.9042	1.8213	$5,181.25
08/26/08	Long	1	DEC 08	Coffee 'C'	146.55	146.60	$18.75
08/21/08	Long	1	DEC 08	Mini Silver	1390.1	1369.0	($211.00)
Net Profit/Loss On Open Positions:							$4,845.25

Account Balances
Current Cash Balance	$52,962.94
Open Trade Equity	$4,845.25
Total Equity	$57,808.19
Long Option Value	$0.00
Short Option Value	$0.00
Net Liquidating Value	$57,808.19

Cashed out: $18,000.00
Total value: $74,518.00

Weekly return: 2.3%
YTD return: -1.0%

***"Cash out" mostly means taxes, but lately I've also been using it to pay down my credit cards a bit. Why credit card debt? I'm financing a startup and trying to outpace my CC interest rate in the futures markets - kids, don't try this at home.

Remember When I Said I Hate Trading Coffee?

Here's a great case study. Woke up this morning, pleasantly surprised to see coffee up 3 cents from my entry point.

And then, before I could put down my morning cup of coffee - prices rolled over. Guess I didn't put it down fast enough:



Better get my ass down to Starbucks!

Coffee Breakout - Off to the Races?

Note: This article has been published by Seeking Alpha.

Coffee futures are not my favorite to trade. They're so volatile that it's tough to distinguish a true breakout from noise.

Hopefully for me (I went long the Dec contract today), this move has more legs than the head fake from June:



Taking a step back, the long-term trend for coffee is up, up, up:


Long-term fundamentals are very favorable for long positions. The world continues to increasingly caffeinate itself with coffee, driven by - you guessed it - China and the rest of East Asia. A small but growing coffee market continues to gain ground on tea, the traditional caffeinated drink of choice.

On the supply side, most of the world's coffee comes from Brazil. So coffee supplies are heavily dependent on the quality of the Brazilian harvest, for better or for worse.

Coffee fundamentals are setup for us to see a super spike over the next 5 years. I firmly believe we'll see $2+ coffee at some point. And coffee has not yet had a major run up, like many of the other agricultural commodities - it's certainly due.

Current Commodity Futures Positions - 8/17/08

Ahhhhhhhhhhhhhhhhhhhhh, relief at last - that's me, pissing away the last of my 2008 gains. Glad we got that out of the way.

Tuesday I was feeling really smart, and bought a mini-silver contract at the bargain price of $15. Unfortunately nobody told me that the bargains were going to get even better! I sold silver on Friday for just over $13.

Hey, I got exactly what I deserved. Look at this chart of gold and silver, courtesy of Agora Financial:


What kind of idiot would try to time the bottom of that spike through the basement floor? (Pointing both thumbs at my chest...) "This guyyyyyy."

On Friday, I jumped into a vat of rough rice and holy water, and repented for my trading sins. Last time I fully repented was last November, when I developed a new trading outlook. That outlook served me very well until I decided I smarter than it.

Well, here's to new beginnings. As I repeat the mantra I should never have forgotten "The trend is my friend, the trend is my friend, don't eat yellow snow, the trend is my friend..."

Open Positions

Date	Position	Qty	Month/Yr	Contract	Entry Price	Last Price	Profit/Loss
08/12/08	Short	1	SEP 08	British Pound	1.9042	1.8620	$2,637.50
08/15/08	Short	1	DEC 08	Cocoa	2589	2587	$20.00
08/14/08	Short	1	NOV 08	Mini Soybeans	1260	1221	$390.00
Net Profit/Loss On Open Positions:							$3,047.50

Account Balances
Current Cash Balance	$56,272.41
Open Trade Equity	$3,047.50
Total Equity	$59,319.91
Long Option Value	$0.00
Short Option Value	$0.00
Net Liquidating Value	$59,319.91

Cashed out: $18,000.00
Total value: $77,319.91

Weekly return: -8.0%
YTD return: 1.2%

***BTW, I usually "cash out" money just to pay for taxes, rent, and cheap beer. So total value is all pre-tax.

Current Commodity Futures Positions - 8/10/08

Took some more cash out this week to pay a credit card, and also pump some more cash into our startup.

Well, my hopes/dreams for '08 being a banner year I think are officially in the tank. Earlier in the year, I was hoping I could keep running up the account, and essentially use it as an ATM to fund my life and startup simultaneously.

Alas, it wasn't to be - really it's turning out to be a bummer year for agriculture. What started off so strong has essentially retraced all the way back (pull up the charts for soybeans, corn, cotton, etc - we haven't moved much). Tough to make money long commodities when they are not going up.

From here on in, I'm looking at doing some more trading in pairs, a la Dennis Gartman. My first try at this is my Long Cotton/Short Soybeans trade, and I must tip my cap to Bud Conrad of Casey Research for his astute short soybeans call in a recent publication. I was already long cotton, but would not have thought to short beans had it not been for an outstanding research piece by him.

Last week was a terrible time to be long any currency other than the US dollar, as the dead cat bounce is in full swing. Have to admit even though we've discussed it here that the dollar was due for a bounce, the magnitude and strength of it has really surprised me.

I'm considering adding a short British Pound position to compliment my (underwater) long Swiss Franc position. The UK economy is in trouble, and the BP could be in a race with the US dollar to the cellar - at least that pair would help hedge from further dollar rallies.

Overall a great entry point for the Swiss Franc and many of the Asian currencies here, I think. The dollar has further to drop, no doubt, but it will be a race to the cellar with many of the other currencies. I don't see the Euro, British Pound, or Canadian dollar climbing much more vs. the US dollar.

Also a great entry point for soft commodities - most notably sugar, coffee, and cotton. This trio is still trading at very depressed prices.

Open Positions

Date Position Qty Month/Yr Contract Entry Price Last Price Profit/Loss 06/17/08 Long 1 DEC 08 Cotton 82.20 69.05 ($6,575.00) 08/05/08 Short 1 MAR 09 Soybeans 1303 3/4 1220 $4,187.50 07/29/08 Long 1 OCT 08 Sugar #11 12.84 13.46 $694.40 07/31/08 Long 1 OCT 08 Sugar #11 13.91 13.46 ($504.00) 07/31/08 Long 1 SEP 08 Swiss Franc 0.954900 0.9219 ($4,125.00) Net Profit/Loss On Open Positions: ($6,322.10)

Account Balances
Current Cash Balance	$70,774.87
Open Trade Equity	($6,322.10)
Total Equity	$64,452.77
Long Option Value	$0.00
Short Option Value	$0.00
Net Liquidating Value	$64,452.77

Cashed out: $18,000.00
Total value: $82,452.77

Weekly return: -9.3%
YTD return: 8.3%

***BTW, I usually "cash out" money just to pay for taxes, rent, and cheap beer. So total value is all pre-tax.

Worst Month for Commodities Since 1980

If you, like me, are wondering where you've gone wrong in your trading over the past couple of months - we can take some minor solace in this fact.

The CRB commodity benchmark index fell over 10% in July, marking the worst month for the index since 1980 (which, incidentally, marked the end of the last bull market).

While I believe we are only in the 4th or 5th inning of this bull market, a couple lessons come to mind:

• The easy money has been made - buying oil at $12 was a no brainer. Buying oil at $120 could burn you in the short-medium term.
• All bull markets have pull backs. Commodities took off out of the gates to begin the year, but many have since retraced and given back most or all of their gains. This has been reflected in my trading performance (up an easy 100%, then giving most of those gains back since).

Bottom line, make your shopping list now, and go easy on the leverage. Nobody wants to be leveraged to the hilt during a correction, but it's tough to know when the next leg up will come - I prefer to have a skin in the game at all times.

My favorites right now: sugar, coffee, cotton, live cattle, lean hogs. Currently still long sugar, cotton, and live cattle.

Current Commodity Futures Positions - 8/03/08

Will post some thoughts later in the week on the positions...

Open Positions

Date Position Qty Month/Yr Contract Entry Price Last Price Profit/Loss 07/23/08 Long 1 SEP 08 Australian Dlr 0.9567 0.9280 ($2,870.00) 06/17/08 Long 1 DEC 08 Cotton 82.20 70.72 ($5,740.00) 07/30/08 Long 1 FEB 09 Live Cattle 108.850 110.225 $550.00 08/01/08 Long 1 FEB 09 Live Cattle 110.700 110.225 ($190.00) 07/29/08 Long 1 OCT 08 Sugar #11 12.84 13.78 $1,052.80 07/31/08 Long 1 OCT 08 Sugar #11 13.91 13.78 ($145.60) 07/31/08 Long 1 SEP 08 Swiss Franc 0.954900 0.9574 $312.50 Net Profit/Loss On Open Positions: ($7,030.30)

Account Balances
Current Cash Balance	$81,107.68
Open Trade Equity	($7,030.30)
Total Equity	$74,077.38
Long Option Value	$0.00
Short Option Value	$0.00
Net Liquidating Value	$74,077.38

Cashed out: $15,000.00
Total value: $89,077.38

Weekly return: -3.8%
YTD return: 12.9%

***BTW, I usually "cash out" money just to pay for taxes, rent, and cheap beer. So total value is all pre-tax.

Current Commodity Futures Positions - 7/27/08

Current thoughts on these futures markets:

Australian dollar - Of course, what would a currency trade be without a trip to the wrong side of the ledger? I've decided I am no longer using breakouts to determine my entry points with currencies, and have jumped into the Aussie on what I deemed a 'pullback'. Since, the market has pulled farther back.

Even so, I still like the Aussie to reach parity with the US dollar (probably sooner rather than later). You've got the nice interest rate differential, and you've also got a commodity currency vs. a make believe currency backed by the faith of the US gov't.

Cotton futures - Bounced a bit. They have to head higher eventually. Jim Rogers, in his talk at the Agora Investment Symposium this week, named sugar, cotton, and coffee as his favorite commodities right now.


Corn futures - Still in free fall to start the week, have since bounced a bit. Remember corn started the year at $4, so it is still up nearly 50% on the year. Traders are in waiting mode right now, trying to figure out how this year's crop is looking - and right now, despite the flooding, it looks pretty good.

Potential trades on the horizon for me:

• Long sugar
• Long coffee
• Short US treasuries (esp. 10 year)
• Long Swiss Franc
• Long Japanese Yen
• Long Live Cattle
• Long Lean Hogs
  

Open Positions

Date Position Qty Month/Yr Contract Entry Price Last Price Profit/Loss 07/23/08 Long 1 SEP 08 Australian Dlr 0.9567 0.9497 ($700.00) 06/17/08 Long 1 DEC 08 Cotton 82.20 74.80 ($3,700.00) 07/14/08 Short 1 DEC 08 Mini Corn 688 599 $890.00 Net Profit/Loss On Open Positions: ($3,510.00)

Account Balances
Current Cash Balance	$80,487.27
Open Trade Equity	($3,510.00)
Total Equity	$76,977.27
Long Option Value	$0.00
Short Option Value	$0.00
Net Liquidating Value	$76,977.27

Cashed out: $15,000.00
Total value: $91,977.27

Weekly return: Hell, let's just call it even...don't feel like digging out the spreadsheet
YTD return: 16.8%...roughly

***BTW, I usually "cash out" money just to pay for taxes, rent, and cheap beer. So total value is all pre-tax.

Jurgens Bauer on the soft commodities

I don't see too many free columns from good old Jurgens anymore, but they're always worth a read. Comments on coffee, cocoa, sugar, and cotton.

I love reading takes from these old-time commodity traders, as they provide good, rational perspectives. Plus always amusing to see how baffled they are at the circus these markets have turned into.

Money Morning: Avoid Coffee & Cocoa, Buy Sugar

Nice simple breakdown of 3 of our favorite softs - coffee, cocoa, and sugar - by the folks at Money Morning.

I did not realize the coffee harvest is looking so good - suppose that's why coffee cannot break out of it's range. Same with cocoa - I have been avoiding due to the sharp recent drops - it looks like cocoa has no business at these prices.

We'll continue to keep a close eye on sugar prices - keep waiting for the next big sugar rally!

Commodity Market Thoughts

• Cattle's looking good - I'm keeping an eye on the Feeder market also. Wish I still had all my Live Cattle contracts, but oh well - looking to add on a new breakout.

• Pork bellies are not looking good - same article linked above mentions too much supply on the market.

• Quite a breakout by gold and silver over the past few days. Silver looks particularly intriguing, as it has a compelling supply/demand story also. I believe both are sitting right around their 50-day moving averages.

• All the commodity currencies are rallying quite strong. Will be interesting to see if the Aussie dollar can stay strong if the market turns down. I personally think there will be some short term panic selling, which will also drive the Japanese Yen and the Swiss Franc up.

• Sugar, as our buddy Toby said once, is acting like a giant turd. Too much supply on the market, it appears. Long term it's going much higher - until then, probably best to wait.

• Coffee is looking strong also. I'm going to sit back and wait on this one - coffee head fakes more often than #24.