No Love for the Coffee Market?

EconMatters's picture


By EconMatters  


19 Months in the Downtrend


It has been a rough 19 months in the Coffee Market if you were long, and you had to be real nimble trying to trade the falling knife with some counter-trend trades. Coffee is currently trading around 1.41 per pound, and has been on a prolonged downtrend since peaking in May of 2011 at $3.12 a pound. 


The Coffee market is not as main-stream as many of the other more commonly traded markets. Accordingly, it is quite volatile, and many traders love it`s trending price action characteristics.

The margins are higher to account for this increased volatility, and stops are an essential tool necessary for managing the position and protecting your trading capital. 

Some basic facts about the market, Brazil is the world’s largest coffee producer and exporter, while the U.S. is the world’s largest consumer and importer. 



No Inflation Here


We are finally getting back to the 10 year trading range, for all those inflation hawks, it depends upon when you look at coffee, right now these prices sort of throw a bunch of cold water on the inflation thesis. 


The chart looks absolutely bearish, and exemplifies the age old economic axiom that there is no cure for high prices like high prices. 



Kick a Commodity when it`s down


I think knowing a little bit about trader`s psychology that they will try and push this lower to squeeze any die hard longs, and trend trading being rampant in commodities, really push this to find the absolute bottom, i.e., natural gas at $1.90 last year, they tried it twice to ensure that was indeed the bottom. 



Remember Natural Gas at $1.90?


But just like Natural Gas once the bottom is established this trade could be quite fruitful going the other direction, and the coffee market is worth watching for when the market finally turns and heads higher. 


Key Support Areas


We are at some initial support at $1.40, but I want to watch it and see how this trades around that area as we still haven`t had any pullback in markets at large.


I think there is a possibility that coffee ultimately tests the $1.20 a pound area where I am sure buyers will want to step in and test the waters here from the long side, as the $1 a pound level was established during the aftermath of the financial crisis selloff in December of 2008. 



Positive Risk/Reward Setups


The risk reward parameters are starting to come together for a nice trade setup from the long side, now we must patiently wait for the correct entry point. Therefore, the coffee market has entered the phase where it bears close scrutiny; it first has to get to this stage, now we put it on probation, and study for signs of the bottom, and a high percentage reversal play. 


We want to watch how it handles the key support levels, how it trades in this area, this is where watching price action of the instrument and putting in the chart dues every day pays dividends. A good trader develops a feel for the commodity in order to navigate through the cluster of noise that pervades almost every trading instrument these days!  


Pull up a Coffee Chart


So pull up a Coffee futures chart and watch along with me, you never know when the next Natural Gas style reversal will come, but you have to start being prepared for the possibility ahead of time, as these can be some of the most profitable, and easy to manage trading setups in the markets. 


Commodities love the Trend Trade


Once you are profitable on a reversal, just keep moving your stop up conservatively, and catch a nice trending run if market conditions cooperate. If not, hopefully you picked a decent entry point, and you got stopped out for a small profit, and wait for the next long signal. 


The Coffee Market rarely disappoints 


There may be a couple of false breakouts, but from my experience in markets, it is only a matter of time before the Coffee market reverses this bearish course, and makes another bullish run. It is just that kind of market, great for traders and well worth putting on your trading radar screens.


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DUNTHAT's picture

No guesswork needed.

The capacity of a trading classification to be long or short will dictate when the trend change is imminent.

Room 101's picture

Look instead at crops that require honey bee pollination. Almonds, apples, berries, cucumbers, strawberries. Why: huge over winter bee colony losses throughout the U.S. and into Canada this year. Really, really bad.

Disclosure: I'm a beekeeper but not a gambler in commodities.

Edit:  link to an article on the almond pollination season coming up now.  Almond growers can't get enough bees for ANY price.  Beekeepers can't provide what they don't have and the almond pollination is the most profitable event for beekeepers bar none.  Honey is a byproduct that pays for gas.  The pollination is where the money is.




e-recep's picture

cheap money is creating bubbles in almost everything. after the bubble implodes the concerned market is left in ruins. people being laid off, machinery left to rot, buildings abandoned, etc.

assholes, they are ruining lifes all over the world.

FreeMktFisherMN's picture

I was intrigued by coffee to see if it had bottomed, but now it seems like it wants to go down some more, after that bit of a pick up in price around Dec/Jan. Was going to buy the JO ETF but will be holding off.

By the way, while I obviously agree each commodity has its own idiosyncrasies that affect supply/demand, like weather, geopolitics, etc., the common denominator pushing prices up is the inflation central banks are creating. Supply/demand does its own thing for these commodities, but in terms of what we pay for them with-FRNs,Yen, whatever fiat insert here-the supply of those units is skyrocketing. 

And it is crucial to remember that inflation is the increase in money supply, and that rising prices are a result, but not inflation itself. Malinvestment based on fiat injections replacing legitimate savings (actual foregone consumption) leading to hopeless endeavors is the other major effect. But also, think about opportunity cost when measuring price increases. Prices should come down many times to reflect productivity gains, so even if say the price of something is only up 1% relative to where it was a year ago, that doesn't tell the whole story about the pernicious effects of inflation. What if productivity is very high in producing that product, and that in a free market the price would be down 3-4%. Thus the increase in prices was more like 5% or so, taking into account the opportunity cost. Same with nat gas, too, and all this domestic oil production they rave about. Prices are not falling at all, because they are being paid for in devaluing FRNs. In terms of real money (gold, silver), prices are falling almost always, or at least relatively are constant. 

disabledvet's picture

it is certainly reported that productivity is falling in the USA "leading to some inflation." obviously the USA is not a major coffee producer...but if coffee is your major cash crop (as it is for at least a dozen major nations...not just Brazil--Columbia, Indonesia, Hawaii (country?), etc...) then just as obviously "how efficiently it can be produced is of utmost importance." that says to me two things: first off this price is going no where but down. second...should the USA decide to start drinking tea instead "it will go down to at or near zero." that stock has almost doubled since it IPO'ed last year. "that's your bullish thesis right there." i would not be surprised to see this company start adding zero's to their stock price as well. "The Apple of fast food." I would buy this equity and go long if you believe coffee has nowhere to go but up moreso than "merely the coffee" which they serve and make so well.

billsykes's picture

Don't like it, too many moving parts to a successful trade. Especially with foreign country data (brazil- robusta) weather, governments, tarriffs, changing taxes, co-ops, middlemen, etc. 

I like trading stuff that doesn't grow, rot, fart, or evaporate.



Gordon Freeman's picture

Good article--Thanks, EconMatters.  /KC has been on my radar for the better part of a year.  Agree that we will see 120.  One problem for the long thesis is that Brazil still has coffee stockpiled from years ago, literally.  It seems like an almost endless glut.

Agree with the mooks here complaining about retail coffee prices--you're getting royally screwed by the local Dunkin' Starbucks.  I suppose you could always buy the stock, to hedge your morning fix...

adr's picture

So bullshit trading and massive speculation based on nothing but price moves and following momentum. Not one mention of actual supply and demand. Natural gas should have stayed around $2, but momentum traders tried to push nat gas up to $4 based on absolutely nothing.

So let me get this straight, if coffee goes to $1.20 I should buy and go long because it should shoot up to test recent highs to establish a high price before retesting the lows to test the low price.

All I read is let's try and screw consumers so we can make a buck trading contracts we have no intention of ever taking delivery on.

Its all nonsense. I have an idea, let's allow the market to set a price based on the available supply and demand for the product, WOW WHAT A CONCEPT. My dream is to beat every commodity speculator with an iron rod.

Canned response from the speculative trader, "Don't complain about coffee prices, invest in coffee and make money, derp de derp."

Fuck you.

Let's get back to coffee mania circa 2009 when you had small coffee companies like Diedrich coffee shoot up from $.25 to $33 in a couple weeks. Caught up in the Green Mountain bidding war. Massive overvaluations, stocks shooting up like rockets. Coffee futures doing their best impression of the oil market. Of course that is what the commodity speculators want. If they got in early they made fortunes.

It was all supply related right? All of a sudden there was only one bean for 100 million coffee drinkers. Or was it that everyone would buy 15 Keurig machines.

A three year old with a bubble wand, can't hope to match the Wall Street bubble machine. When I had CNBC on one time my four year old walked in, said "Daddy, what you watching?". I said, "I'm watching people blow bubbles, son." He replied, "Where are the bubles, I can't see them?". Which I replied, "Well the bubbles are so big they are actually inside them, so you can't see them, they even forgot they blew them in the first place." My son replied, "Wow thost must be amazing bubbles, they areprobably fun to pop." I said yesy they are son, yes they are.

LongBallsShortBrains's picture

"Speculators" includes coffe producers, and coffe buyers who wish to minimize risks through futures contracts. Futures contracts between producers and users are created as tools to manage risks with farming. Do you wish to take these tools away from them?

Don't blame the markets because the fed gives certain people currency to "spend" in the markets. The extra digital currency is going to show up somewhere. Don't be pissed off at the coffee market because it shows up there. Even on thhe short side of the market.

Bennie bucks distorted the housing market too. If you owned a house, you didn't complain about the housing "market". If you were a student, and looking to buy in the near future, you probably disliked the bullshit trading and massive speculation in the market.

If you know the markets are screwed up because of all these Bennie bucks going SOMEWHERE.. You have a few choices

1 Complain, and assume to be morally superior to the evil speculators.

2 Try to take advantage of an opportunity to profit, and join in the speculation.

3 Realize they are distorted markets, and leave them alone.

4 Do something to change the situation.

If you believe that traders who make their living off of these markets are going to behave any differently than real estate agents did when the Bennie bucks showed up in their markets, then you have a lot to learn about human nature.

What will you do when the federal reserve starts buying up the widgets that your company produces? Refuse to sell because they are distorting the market? Take a moral stand? No. Not until after the bubble crashes.

You don't get the night out partying without the associated hangover. Don't blame the morning sunshine for the symptoms of the hangover.

Disclosure: I've been short coffee since May. So I am biased.

Fuh Querada's picture

Last time I was short coffee I got the tremors.

balz's picture

Let's see.

Coffee is 50% less expensive.

I now pay 9.99 instead of 10.69 a year and a half ago.

Someone's making money.

disabledvet's picture

Again..."Dunkin Brands." Should they move strongly into the third world with McDonalds as their model then they could grow that business "to the moon." Insofar as natural gas goes it wasn't that long ago when MASSIVE quantities of natural gas was coming from Venezuela to New Jersey to heat the whole State...let along New York City (the 90's.) That country is basically an unlimited supply of now "free" energy for the dollar bloc. I don't see the current Government lasting much longer if they achieve "true hyperinflation." (1000% increases in prices.) Proctor and Gamble is another company worth a look it would be amazing if Venezuela ended up making the dollar the nation's currency as other Latin American countries have already done. Amazing but in my view quite possible. "You'll have to produce 10 million barrels of oil a day just to pay the interest on the local currency debt."

mind_imminst's picture

Don't forget inflation, when no one is making "real" money, and we all lose.

ziggy59's picture

Same weight of beans? Many have lowered the weight 10-20% and nominally raised the price.

Jack Sheet's picture

Jeezus, yet another jerkoff bragging about his prowess in commodity trading. The only parties who make money are the banks and brokerage houses who see through the muppets' trades like a Sears negligee and cream off the commissions.

Shathawk's picture

"This outbreak is “the worst we’ve seen in Central America and Mexico since the rust arrived” in the region more than 40 years ago, says John Vandermeer, an ecologist at the University of Michigan in Ann Arbor, who has received “reports of devastation in Nicaragua, El Salvador and Mexico”. "

mofreedom's picture

why the hell, then, did I just have to pay $8.50 for 11 ozs of Dunkin Donuts blend.  just a couple of months ago it was $6.50.

FeralSerf's picture

A better question is why did you pay that much?  There were other options.

Proftrek's picture

Almost two centuries ago, the West pushed opium into China... This time it will be something almost as addictive: coffee. Seriously, folks, when the bulk of China transitions from tea to coffee (happening in Korea, Starbucks everywhere) then this seems like a good investment...

adr's picture

and if that happens good luck getting the Chinese to pay $20 for a cup of coffee, let alone Americans. Coffee priced like 25 year old scotch.

Once again to become the drink of royalty.

Good luck trading that fantasy.

Imagine the lines at Starbucks for a $20 Venti. They will be snaked around the block. FOR THAT PRICE IT MUST BE GOOD!!!!

dogbreath's picture

when I was in china in 2009 coffee was 40rmb typically and it was often illy or some brand name stuff made with a department store coffee maker.  So thats 5 bucks for a cup of mediocre coffee.  That is beyond the budget of the majority of chinese.


billsykes's picture

It's $26 dollars in Japan.

Coffee is the new wine.  I switched from wine to good coffee, 800 flavor profiles vs 600 in wine.

Zero calories, no hangover, no regrets the next day.

Skateboarder's picture

Buy beans from a coffee cooperative that ethically sources from farms and farmers who grow organically and depending on the area and profile of the bean, perhaps grow in shade. A pound of beans that well taken care of costs about $11 in Cali. Store it air-tight, grind fresh before use, and use only a french press.

Coffee shat out of a drip machine is no coffee at all.

dogbreath's picture

They drink a lot of tea in china.  Displacing more than a fraction of the tea demand wion't be easy.


oh ya you think folgers is expensive , try 20 million a kilo

apberusdisvet's picture

No inflation in coffee?  BS.  Folger's 2 pound red can has gone from  $8.69 to $11.69 in less than 2 years and there is less of Arabica in the blend.

dogbreath's picture

liquid cocaine futures bitchez