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.

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

Brazil Coffee Crop Disappoints

A lack of rain last fall hurt the upcoming coffee crop in Brazil (far and away, the largest producer of coffee). Futures were up big yesterday, and slightly up today as I type.

Worldwide demand is forecast to climb 2.3% this year. Demand outpacing supply - music to our ears.

Coffee trending down

Coffee appears to be trending down again, toward previous support at the 122.50 mark.

According to my new system, I will sell if it hits a 20 day low, and will buy back in on a 20 day high.

So we'll keep an eye out and see if coffee breaks down further.

Still long term bullish on coffee, but using our entry system we should be able to capture most of the upswings, while protecting ourselves on the downside.

What To Do About Coffee

Jurgens Bauer says hang on for now until the market bottoms.

I have to agree - they don't ring a bell at the bottom, but be careful before jumping in. However I believe the long side of this trade is the right one long term.

What's Tanking Coffee

From the DJ news wires:
On ICE Futures U.S., pit-traded Arabica coffee futures sank to 2 1/2-week lows as funds and small speculators liquidated and batches of sell stops were triggered during the retreat. Sellers were spurred by predictions from Brazilian meteorologist Somar and other forecasters that the nation's producing areas - where it's been too dry for spring blossoming - will get rain Thursday and Friday, followed by more showers next week. Pit December closed 9.25 cents lower at $1.3005 a pound.

When this shakeout is complete, I think we'll have a nice buying opportunity. As painful as this is (and it is hurting me big - I'm down over 15% overall in the last 2 days!) - you have to think all the speculators have ditched their positions, giving us a nice base for the next leg up.

Remember, the fundamentals are still strong. And nobody really knows if this crop is going to be damaged or not - the rain may be too little, too late.

Coffee Futures Off Big

Well my first morning back - and I see that all of my gains from last week were completely wiped out by a sharp drop in coffee this morning. I am guessing this is weather related. My December contracts closed today just above 130, after flirting with the 140 mark late last week.

It must be raining in Brazil, or at least rain is forecasted. The question now is what to do. The old saying is to buy on the rumor and sell on the news. Well, it looks like the news hit - at least some of it. Unfortunately I am not a very good trader - I just try to play the fundamentals long term.

So I am planning to hold. I may pickup another contract if I can find some news indicating this sell-off to be overdone. Long term coffee is a buy, so I will endure the swings and just bide time until we get the super spike that's coming.

Here's a good blog that I often read by Jurgens Bauer - he mentions how strong the demand picture is for coffee. It's plain and simple - the world is drinking more and more coffee.

My recommendation here: hold (if you are already leveraged) or buy (if you are looking for an entry point for a longer term position)

Coffee Still Strong - No Rain in Brazil

Coffee in Brazil needs significant rain in October to help the crop flower. However it has been quite dry for a while, and there is no significant rain in the forecast for the next 7 days.

Thus, coffee prices remain strong. Could we see a super-spike coming if this harvest is trashed?

The article goes onto state that India's coffee crop is disappointing as well. Though Brazil is far and away the largest coffee exporter.

Coffee - 'No meaningful moisture seen until month end'

Maybe a buying opportunity in coffee - futures sold off today on profit taking and minor showers passing through Brazil. However, no 'meaningful' moisture is in the 10 day forecast, so the crop will stay dry.

Thanks for the lead on this, Toby.