The information and opinions expressed below are based on my analysis of price behavior and chart activity
March Coffee
Since October of 2023 Coffee prices have more than doubled. The October 10th, 2023 low for this contract was 150.25. Today it settled at 330.35, up 16.85 on the day. We saw prices hit a contract high price the day after the Thanksgiving holiday, but that high of 335.45 wasn’t held, as traders took profits on Friday and Monday of this week. In fact, the selloff was so steep that the market gapped open lower on Monday, leaving untraded prices between 316.80 and 315.90. In my experience, futures markets do not like gaps in price and will usually attempt to fill in those price gaps. Today, that gap was filled and the market kept on going higher to settle at a new contract-high close. That tells me that we still may have more strength ahead of us. Fundamentals are strong, as there have been drought conditions affecting the crop production in South America (Arabica) and Asia (Robusta) for the past few of growing seasons. Coffee trees usually run on a 3-4 year growing cycle, as far as I know, from seed (planting) to fruit (harvest). The weather can have long term effects on yield that often aren’t readily or easily identified. In other words, adverse weather events that happened a year or two ago are having an impact on the current crop. Add to that a new environmental push from some lawmakers around the world and you’ve got the makings of a very bullish market. Now some of those laws are being re-considered (EU) as politicians see the effect their policies have. Basically, the EU (they’re not the only ones) put out a regulation that restricted crops grown on land that has been de-forested for agricultural production. Now I have no doubt that we all want to be good stewards of the land, but this is a case of overreach, in my opinion. Recently, I’ve read several news items stating that the EU, and others, are going to rescind those regulations. Not because it’s a bad idea, but because now there are (unintended?) financial implications to the public. Many people around the world enjoy Coffee, but no one wants to pay double for it, and the politicians are hearing from their constituents. The drought in Brazil has been so bad, that as recently as October of this year, the Amazon water levels dropped to 122-year lows. That’s a result of El-Nino being a bit more severe this time around. So how high can prices go? The short answer is I’m not sure. I’ve included the continuous weekly price chart below, to show how high prices are and how they’ve behaved in the past. The all-time high was posted back in April of 1977(!?) at 339.90. That’s only 9.55 away and if this exuberance continues, we’ll likely be there early next week. The chart below doesn’t offer any clues, to my eye, as to where the upper limit might be. Keep in mind, the price charts are NOT adjusted for inflation and do not reflect any such calculation. Using a simple calculator found here https://www.bls.gov/data/inflation_calculator.htm and provided by our Bureau of Labor Statistics, 339.90 in April of 1977 dollars translates to 1,788 in October 2024 dollars. That price level seems like a HUGE stretch to me, and I would think that highly unlikely and very unreasonable. One thing that the chart below does tell me is this: When this market makes it’s high, it usually does it as a “spike” and reverses direction very quickly. It does not, usually, consolidate at highs. It typically turns and runs right back down. But, like most bull markets, when it’s running higher like this, gains can become extended and price moves protracted. At this point in time, I would advocate for traders to be long this market, as the adage goes “the trend is your friend” But this is not a market for the faint of heart, or those with smaller trading accounts. I certainly expect new highs to be made in this market and the trend is still very strong. Since December of 2023, prices have averaged a monthly gain of 6.52, with 10 out of those 13 months seeing higher prices. Last month, November, was by far the largest gain, up 72.55. And this month, all 5 trading days of it, we’re up another 12.30, exceeding that average monthly gain. 340.00 seems like a reasonable upside target, just above the all-time high and not too far away, along with 350.00 because it’s a nice big, fat round number. At the monthly pace described above, we could be at 400.00 in about 10.5 months. If it continues at November’s pace, we’ll see a 400.00 print by the new year. Call options may be a more effective way to manage the risk on a long trade, but they are very expensive (350 March Calls settled at 20.78, $7,792.50, plus commissions and fees) That’s almost as much as margin on a futures contract. Very aggressive and very well-margined traders may do well to consider long positions in the futures, but I would strongly suggest using Put options (2:1) to protect futures trades and account equity if you intend to hold them. If you’re comfortable using price targets, I would suggest traders set GTC profit targets to exit positions, then re-evaluating once those targets are hit. Much like the semi-recent bull markets in reaction to COVID and the Ukraine war, I would expect that you’ll get several bites at the apple, so to speak. If you’d like to discuss Coffee and how you might effectively trade it, please give me a call.
Weekly Coffee Prices – Front Month Continuous Data
Jefferson Fosse Walsh Trading
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