Could Have Volcanic Eruption
over the last 20 years (11 two-year cycles), has seen
three two-year cycle global surpluses and eight two-year
cycle global deficits (coffee typically runs in two-year
cycles with an up year and a down year). In that time,
the cumulative net global deficit has been -36 million
bags. This deficit has been satisfied by Brazilian buffer
stocks that will approach zero in late spring. Price
has not risen high enough to generate an increase in
planted acreage and the needed spending on crop inputs
to increase production.
is on the verge of repricing higher 20 years worth of
insufficient pricing. Typically any repricing following
extended mispricings overshoots the fundamentals. In
coffee’s case, the fundamentals support $2-$2.50 per
pound, absent any adverse effects from Mother Nature.
Should Mother Nature provide a frost or drought, or
if the current concern over the flowering/blooming phase
irregularities from this fall prove to be justified,
there may not be any coffee available at any price.
would be similar to what happened to Colombian coffee
prices in early 2009 (record differentials) and what
appears likely to happen again, only more extreme, in
Colombia in 2010. Differentials against New York futures
already have shot up 50¢ per pound and they keep rising
and it is not even the highest demand period. The crisis
in supply in Colombia could now spread to Brazil and
set off a Roman candle of roaster buying panic.
bottomless cup here,” shows that supply and demand remain
in an unsustainable imbalance. The main Intercontinental
Exchange (ICE) warehouses for storing coffee in the
United States are located in New York, Miami and New
Orleans. Currently, New York has 452,000 bags, Miami
has 73,000 bags and New Orleans has 516,000 bags. These
represent the lowest levels in more than a decade. The
only other time when supplies were lower was in 1997,
the last major bull market. However, in 1997 Brazil
had huge buffer stocks available to tap when the price
was right. In the spring of 2010, Brazil will only have
between 0 and 2 million bags in reserve. If the certified
ICE warehouse stocks in the United States keep dwindling
as they almost have to, then where will the coffee come
from to replenish depleted U.S. supplies? It can only
come from private roaster coffee buffer stocks, which
are near record lows in terms of the historical stock
to usage ratio.
at some point in 2010 will need to be rationed to promote
global production and buy time for this production response
to filter into creating production surpluses that can
rebuild depleted global buffer stocks.
earliest that this scenario could happen would be in
crop cycle year 2012/2013. This would only be possible
if prices spike and remain high for an extended period
of time. The longer coffee takes to spike higher, the
higher coffee prices will ultimately need to go to address
this gross imbalance. “Caffeinated” illustrates that
a bullish contracting channel has been in place since
July. A break out of this pattern above the upper channel
line is likely. At year end, coffee prices were sitting
at the lower end of the channel at an ideal entry point.
March 2010 contract is the spot price currently and
is where futures purchases should be concentrated. A
breakout of this pattern to the upside would place the
next major historical technical price objective at $2
per pound. This would represent a move of around 60¢
from current levels, a profit per futures contract of
$22,000 with an initial margin requirement of $3,200.
Protective stop orders should be placed 10¢ below entry
or just below a break of the lower trend line to mitigate
downside risk. This provides a risk reward of 1:6 with
the potential to increase sevenfold the initial margin
requirement. This is an appealing risk profile.
Hackett, commodities broker and author of the Hackett
Money Flow report newsletter (hackettadvisors.com),
is a nationally recognized agricultural commodities
expert with more than 15 years of money managament experience.