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...

Wheat, Corn Stocks Still at 30-Year Lows

Despite record harvests last year, corn and wheat stocks are still sitting near 30-year lows.  Which means, anything short of a bumper crop could send the grains skywards once again.

Here are some very cool charts, courtesy of Chris Mayer at DailyWealth, that depict the stocks-to-use ratios of of wheat and corn since 1970, versus their inflation-adjusted prices.

Investing in grains is actually pretty easy - when supplies are low, and prices are low, you know prices should eventually go up.  Then, at some point, high prices spur enough new supply onto the market that prices come down.  Ideally, that's when you go short!

You'll notice from the charts that grain stocks and prices move in fairly long cycles - about 15 to 20 years in length.  It takes time to bring new supply online, to replenish stocks...ultimately to rebalance the supply/demand situation.

This time should be no different.  China is industrializing in a big way, and its citizens have taken a liking to eating, a habit they're not likely to give up, no matter how bad the global economy gets.  Most notably, they are adopting Western style high protein diets, with lots more meat...and livestock require a lot of grains to raise.

Bottom line - it's safe to tune out the talking heads on TV when thinking about agriculture...just focus on supply and demand.  It's that simple.  When demand exceeds supply, prices will rise, until supply is able to overtake demand.  Sure, things like currency devaluation, a falling dollar, will toss fuel on the fire...but at the end of the day, it's all about supply and demand.

Why Agriculture Prices Have Held Up Remarkably Well

A recent piece in The Economist highlighted the recent strength of agriculture prices in the face of the downturn, and the reason for it.

Though prices of the meats, grains, and softs are still off their 2008 highs - they're not off by much anymore - as commodities such as cotton, soybeans, and sugar are starting to rally in a big way. 

How could this be?  Aren't we in a Depression?  Perhaps, but supply has come offline in a big way, while demand has remained strong.  As the Economist piece points out: "No matter how bad things get, people still need to eat."

It's looking like, though there were many bubbles in 2008, China's food consumption was not one of them.  Back to the article, with some staggering numbers:

China’s role has been profound, reflecting its enormous economic progress and huge population. In the past decade, says Carlo Caiani of Caiani & Company, an investment-advisory firm based in Melbourne, the consumption of milk has grown seven-fold, and that of olive oil six-fold. China is consuming twice as much vegetable oil (instead of less healthy pork fat), 60% more poultry, 30% more beef and 25% more wheat, and these are merely the obvious foods. Scores of niches have expanded dramatically: people are drinking four times as much wine, for example.

And yet even with all this growth, people in China still, on average, consume only one-third as much milk and meat as people in wealthy countries such as Australia, America and Britain. The gap is even larger with India, which is also growing fast. Overall, protein intake in Europe and America is unlikely to expand much, but a combination of rising incomes and population in developing countries could increase demand by more than 5% annually for years to come. “Once people are accustomed to eating more protein, they won’t take it out of their diet,” says Mr Caiani.

And remember, many food stock levels are at historic lows.  Unless new supply comes online soon - and I don't know where that supply is going to come from - we could be in for a whale of a rally in food.

Read the full article in The Economist...

Further reading about investment opportunities in agriculture:

• Soft Commodities are Starting to Scream: "Inflation!"
• Sugar Futures Rally, OJ Takes a Breather
• Time to Invest in Orange Juice?

Soft Commodities are Starting to Scream: "Inflation!"

Milton Friedman said that inflation is "always and everywhere a monetary phenomenon."  Judging by the recent price action in many of the soft and agricultural commodities, they appear to agree.

Ben Bernanke, a student of the Great Depression, is making a bet the Friedman was wrong.  Bernanke believes that because Friedman did much of his work during a period of time when the velocity of money was relatively constant, he did not properly account for this factor in determining inflation.

Helicopter Ben is conducting this "Great Experiment" of money printing to stave off a Depression based on the monetary theory developed by economist Irving Fisher, who believed the Depression occurred because money velocity dropped off a cliff, and there was no increase in money supply to counter this.  Thus the US slipped into a deflationary spiral.

This is the big question - when the velocity of money drops, as it is today, should the money supply be increased?  Who's right - Fisher or Friedman?

We don't yet know - though, as always, the market will decide the winners and losers.  And lately it's hard not to notice what the commodity markets have been telling us, especially agriculture.

First, let's see Exhibit A - the adjusted monetary base of the US, which still appears to be in a "bull market":

Many of us saw the initial spike and immediately yelled "Inflation!"  We loaded up and gold and ran for the hills.  And what happened?  The spike in monetary growth continued to grow to the sky, and gold got slammed - along with almost every other asset class.  (Save the US Dollar and US Treasuries - hats off if you had that trade, as you are a true "contrarian's contrarian"!)

Fast forward to a few weeks ago, and we noticed that not only had commodities appeared to have formed a bottom, but they were starting to climb.

This week, we saw a full fledged break out in the softs and the grains - let's quickly have a look at three of our current favorites.

Sugar futures - our old favorite - rallied over 5% this week, to close a shade under 15-cents.  Sugar's been on a steady climb - fundamentals look quite appealing, as we discussed last week, and there's no arguing with this chart:

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View the full YO/K9-NM chart at Wikinvest

Cotton futures continued their strong rally, breaking right past the low 50's resistance we were keeping an eye on:

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View the full CT/K9-CT chart at Wikinvest

Finally take a look at Soybeans!  This rally was kicked off when soybean acreage came in below expectations, and it's been off to the races ever since:

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View the full S/K9-CB chart at Wikinvest

So which will it be, inflation or deflation?  Don't get too hung up in economic theory - remember that the markets are always right.  And right now, these markets, buoyed as well by strong fundamentals, appear to be casting an emphatic vote for inflation!

 

Top Commodity and Economic News...

• Why gold is going much higher than $2,000
• Jim Rogers interviewed by GoldSeek Radio
• The US is now "swimming" in Natural Gas
• Atlas Shrugged sales are soaring!

Current Futures Positions

Nothing new...unfortunately!  I thought about adding to the sugar position on Thursday - and I should have!  Will seriously look at adding another contract tomorrow or Tuesday on continued strength.

Date Position Qty Month/Yr Contract Entry Last Profit

04/08/09  Long  1 JUL 09 Orange Juice 81.95 85.10 $472.50

04/20/09  Long  1 JUL 09  Sugar #11     13.79  14.91$1,713.60

Net Profit/Loss On Open Positions $2,186.10

Current Account Value: $26,920.49

Cashed out: $20,000.00
Total value: $46,920.49
Weekly return: 3.5%
2009 YTD return: -47.0% (Don't call it a comeback!)

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

Initial stake: $2,000.00

Editor's Note: This article was also published by SeekingAlpha.com.

Sugar Futures Rally, OJ Takes a Breather - This Week In Commodities

Sugar Futures Surge to a 6-Month High

Sugar futures rallied nearly 4% on Friday, over half a cent, to close the week at 14.18.  Looks like we've got a new breakout to the upside!

Sugar futures continue their steady climb.  (Source: Barchart.com)

The market continued to focus on the news that India may turn into a net importer of sugar this year.  Indian production is falling to a 4-year low, which, surprise surprise, is spurring prices up.  Don't worry though, Indian politicians are on the scene, with rhetoric and threats of banning futures trading to "halt" this price rise - ha!  

Also bullish for sugar is continued strength in oil prices, which means Brazil will use more of its sugar for fuel.  Last report I recall reading had Brazilian ethanol profitable at roughly $50 oil, so that's the number I keep an eye on.

Finally demand for sugar is still projected to outpace supply this year, so we've got some strong underpinnings for a sustained rise in sugar in the months to come.  

OJ Takes a Breather

Orange juice futures took a bit of a breather this week.  Appears to be just a technical correction and profit taking, as I was not able to find any fundamental news to challenge our initial hypothesis for going long OJ.

Orange juice cooled off this week.

Other Commodity and Economic News

• Oil supply is coming offline at a breathtaking clip
• Natural gas is nearing its cost of production
• How bad will the financial crisis get?

Current Futures Positions

Rolled the May contract over to July earlier in the week.  Other than that, not much new. 

Thinking about adding to OJ, sugar positions on further strength.

Date Position Qty Month/Yr Contract Entry Last Profit

04/08/09  Long  1 JUL 09 Orange Juice 81.95 85.00 $457.50

02/27/09  Long  1 JUL 09  Sugar #11     13.79  14.12 ($672.00)

Net Profit/Loss On Open Positions $1,286.30

Current Account Value: $26,020.69

Cashed out: $20,000.00
Total value: $46,020.69
Weekly return: 0.1%
2009 YTD return: -48.8% (Don't call it a comeback!)

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

Initial stake: $2,000.00

Tough Year Ahead for Corn Farmers?

Corn farmers could be in some trouble this year reports the Batavia News, an upstate New York newspaper.

The (corn) price has been hovering near $4. That could be trouble for farmers if there is an average or below average crop.

Many of his customers have ordered more soybean seed. That crop requires less fertilizer. New York farmers last year planted 235,000 acres of soybeans, the most ever in the state. That was up 15 percent from the previous high of 205,000 planted in 2007.

Tip of the hat to Tom Rivers on a very well written and investigated piece!

Food Supply Problem More Acute Than Ever

Chris Mayer writes in Agora Financial's Rude Awakening that the global food supply problem is more acute than ever before, as a result of the current financial crisis.

This is something we've been discussing here of late. Farmers cannot get basic loans for fertilizer. Forget about new capital investments. And this all happening with world inventories of the grains hovering near historic lows.

BOTTOM LINE: Pick up some agricultural commodities at these depressed prices. Ag-flation is coming - you may as well profit off it!

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:

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.

DailyWealth: Brazil Key to Upcoming Food Crisis

Full article

Summary:

• UN says world food production must increase by 60% over next 20 years to meet demand
• Grain and meat production is extremely water intensive - many areas in the world do not have the excess water to ramp up grains and meats
• Brazil will be the key - it has 23% of the world's arable land, and 40% of it is currently unused
  

Kevin Kerr: Farmageddon

Full story

Summary:

• Kerr believes a sharp correction could arrive at anytime
• Corn prices are likely to remain high as long as the US gov't continues to subsidize ethanol
• Longer term, the bull market in ag commodities should continue for some time
  

What to Make of the Soft Commodity Rally

What to make of the '08 soft commodity rally? Things have happened so fast - even I'm not sure in the short term. I still believe that the long-term case (next 5-10 years) is firmly in place. Rising demand and limited supply will take time to fix - and by that time, most of the soft commodities (sugar, coffee, cotton, cocoa, etc) should make all-time highs.

In the near term, things are certainly exciting, but a bit dangerous. The softs are up big this year - their prices are being driven hard by investment funds and speculators piling into these markets.

Let's take a quick look at the news to get a view of the fundamentals of my three favorites: coffee, sugar, and cotton.

Coffee
Brazil just had a disappointing harvest - off 21% from last year, due to dry weather during the flowering season. Remember back in Sept/Oct, when coffee rallied on the dry weather - then dropped when it rained. Well, turns out it was not enough rain after all.

Brazil is far and away the world's largest coffee producer - so as Brazil goes, so do coffee prices generally. However there are also speculations that Vietnam and Colombia will also report sub-par harvests.

World demand is going up, as the world turns more and more "American". Keep a close eye on China and the rest of Asia, as a very small but growing coffee market continues to gain ground on tea, the traditional caffeinated drink of choice.

Could there be setbacks? Of course. However, the fundamentals are setup for us to see a super spike in coffee over the next 5 years - and I believe we'll see $2+ coffee at some point.

Sugar
After sugar made its run at 20 cents a couple of years ago, guess what happened? A ton of sugar came on the market. Inventories of sugar went up - and in concert, the price went down - all the way below 10 cents again.

Well sugar is on the move up once again - now climbing above 13 cents. According to investor Felix Zulauf, the price of sugar still lags below the cost of production in the two largest sugar producing countries: Brazil and India.

The story of sugar is, and has been, its use as a biofuel in Brazil. Last time I checked, oil was still high - so I have no reason to suspect the demand of sugar as a biofuel to do anything but increase. Remember, sugar is the only economically viable biofuel without subsidies.

The price is going higher at some point. This may be the beginning of the move. Be careful though - as there is still a fair amount of inventory on the market to work through. And if the speculators head for the exits, the price could take a hit. All setbacks will likely be temporary though, presenting buying opportunities for those not yet long.

Cotton
Now this is one of the few commodities that has done absolutely nothing since the bull market started! This excites me. It's still cheap, and it has to move at some point - and we have a lot of upside ahead of us.

Of course, there are a lot of smart people that realize this. Fundamentally, cotton acreage will continue to suffer - as farmers in the US South and other places plant higher priced crops (basically anything at this point) in favor of cotton. Supply goes down, demand is rising, and prices skyrocket - the beauty of a bull market.

Demand for cotton is increasing at a breakneck speed in the places that matter most - China and India. Demand is decreasing in the developing world, but the increase in China and India is now enough to offset this decline. Expect cotton to spike sooner rather than later.

This article was published by Seeking Alpha

Daily Wealth: The Bull Market That's Killing Domino's Pizza

Article in today's Daily Wealth about how the bull market in commodities is hurting the fortunes of food companies.

Summary:

• Gov't mandates for corn-based ethanol have driven up all grain prices
• For the forseeable future, consumers will pay more for food
• The stock prices of food producers have been hammered, as they struggle to deal with rising costs
  

How to profit from rising soft commodity prices

Nice article in Moneyweek with quotes from our hero, Jimmy Rogers.

Kevin Kerr's Hot Commodities for '08

Over at Agora, commodities guru Kevin Kerr listed his hot commodities for '08.

In short, he likes the soft commodities - especially cocoa, coffee, and sugar. Both coffee and sugar have been pushing higher over the past couple of weeks.

I picked up another sugar contract this morning in an attempt to pyramid this rise. Hopefully it will continue!