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How much will you pay for your Starbucks with South American drought?

Shawn Hackett
Published 2/3/2014

The softs complex continues to heat up with coffee at the epicenter of a major weather market spike. The ongoing drought in central Brazil that has engulfed the month of January promises to continue through at least the first half of February.

This is a drought that mainly affects coffee (NYBOT:KCH14), sugar (NYBOT:SBH14) and orange juice (NYBOT:OJH14). The grains are largely unaffected by this so far but speculators may buy them as a sympathy trade. Any rally in corn or beans that ensues should be sold with aggression.

Coffee is the market with the greatest potential production shortfall impact with orange juice second and sugar a distant third.

The coffee market has not traded a legitimate weather market since the drought of 1999. Of the droughts seen in the past 45 years only the years of 1989 and 1990 saw a January as dry as the one just seen. Coffee production fell by 34% during that time in Brazil.

All eyes will be focused on the February weather patterns but should the current dry forecasts for much of February hold, then a major weather spike can be expected.

Looking at all the performances of drought price spike years of the past in coffee and in looking at the peak relative price relationships of coffee prices to the Brazilian real suggest a legitimate weather spike drought move could reach $2 per pound before exhausting itself.

A slide presentation is included in the complete report (linked below) to give you a more visual representation of the current state of the coffee market and the various considerations on how to view the current drought in Brazil in the correct context.

The main pivot points of $1.32 and $1.50 per lb. offer resistance in the near term.

Beyond that there are reasons to be a longer term bull on coffee as increases Asian demand meets head on with stagnant Brazilian coffee production.

Click on link for full report

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