With a more bullish fundamental setup for next year and a movement by fund traders and investors to own commodities and shy away from owning the US dollar, the coffee market appears poised to attract significant new buying interest in the months ahead. Open interest for coffee declined 18.4% during the middle part of November, but the turn higher in late November and early December may be considered a supportive force.
A concern for the available supply of higher quality coffee from both Colombia and Brazil along with the potential for a flow of more money from fund traders to commodity markets leaves the outlook for coffee into early next year bullish. Colombia growers believe that exports of coffee for 2009 will reach just 8.1 million bags, down 27% from last year. Production is expected to recover for the coming season, but the recovery is coming much slower than expected and disease issues are still a concern. Continued talk that the Brazil crop this year received too much rain during the normally dry harvest period, which resulted in up to 40% of the crop slipping to a lower quality grade has also lent support to prices. As a result, the supply of higher quality coffee is tightening into 2010, and up to 3 million bags of the Brazil harvest may move into government storage. Brazil exported 2.439 million bags of coffee in November compared with 2.396 in October and 2.857 million bags a year ago. A tighter supply from producing countries is beginning to provide solid underlying support to the market, and if we begin to see tightening supply from consuming countries, the market may see the need for pushing to a higher price level.
The trade has seen the outlook for a bumper crop out of Brazil next year as a major obstacle to moving higher, but the first production outlook from Brazil last week may have eased this concern. While the region has seen regular and consistent rains during the flowering period of the past few months, the Brazilian crop estimate came in last week at near 44 million bags, down form trade estimates that had been running from 45 million to as high as 55 million bags. While the official Brazilian government production estimate typically comes in below trade estimates by 3-4 million, the new government estimate is still well below the trade forecast, and this may provide a solid base of support for the market into early next year. US ICE certified exchange stocks have declined in recent months to their lowest level since February of 2003, to reach just 3.18 million bags at the end of November. Coffee stocks in Japan at the end of October totaled 111,477 tonnes, which was down from 123,127 in September and down from 131,542 tonnes in August. While stocks at key consuming countries are still considered relatively high, the downtrend in supply is still a positive force, and this may provide some underlying support.
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* Buy March coffee at 140.55 with an objective of 152.05. Risk to a close under 138.75.
* Buy the May coffee 145.00/160.00 bull call spread from 490 with an objective of 945. Risk 120 points from entry.
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