NEW YORK (Dow Jones)--The coffee market is caught in a game of chicken near two-year highs as speculators pause for lower prices to buy while bean producers hold out to sell at higher levels.
Nearby July coffee settled 0.60 cent, or 0.4%, lower at $1.5875 a pound on ICE Futures U.S. The contract hit $1.6225 during the session--the strongest price for a nearby contract since March 6, 2008. Coffee prices have rallied 20% since June 7 in a chain reaction of buying amid tight supplies, technical cues and general market-specific fervor that several analysts have referred to as "perfect storm" conditions. The market barely moved 10 cents in two months, and
then shot up 26 cents in six days.
Now traders are on the edge of their seats for the next clue to the market's direction.
"You have a very quiet, uneasy consolidation," said Luis Rangel, vice president for commodities derivatives at ICAP Futures in Jersey City, N.J. "The market's very gun-shy here."
Several market participants said coffee's jump was sparked last week by a big agricultural trading house. The firm held short positions in the U.S market, as well as on London's NYSE Euronext's Liffe, to lock in prices for the coffee it promised to deliver to roasters. The firm then decided to buy those offerings back to erase their responsibility to deliver beans. This set off a chain reaction among speculative investors who were betting that prices would fall further. They, too, were forced to buy to cut their losses. At the same time, the sharp spike attracted buying from bullish traders who anticipated prices would continue their move higher.
The move comes against a backdrop of depleted world stockpiles. Global stockpiles of both premium arabica and cheaper robusta beans, grown in countries such as Vietnam, are falling. Earlier this month, the International Coffee Organization revised down its forecast for world coffee output in the 2009-10 season by 1.1% to 120.6 million bags, each weighing 60 kilograms, due to disappointing harvests in Africa, Central America and Mexico. Consumption is pegged at 134 million bags.
Coffee futures held in a 10-cent range since January as traders expected a bumper crop from Brazil to alleviate the tight supplies of the high quality mild washed arabica beans traded on ICE. Those beans have been in increasingly short supply for nearly two years after back-to-back El Nino-related weather events stymied harvests in Colombia, Central America and Mexico.
Brazil is the world's largest coffee producer and No. 2 consumer behind the U.S. The coffee crop for the year ending June 2011 is forecast to be 23% higher at 55.3 million bags, according to a U.S. Department of Agriculture report.
Some industry estimates peg production at as high as 60 million bags. Roughly half of those beans are arabica, but industry members estimate only about 10% of them qualify as the high-grade "washed" variety that is demanded for premium blends.
"The low-quality nature of the current Brazilian coffee crop harvest is not going to be able to alleviate the extreme scarcity of high-quality, mild washed arabica," said Shawn Hackett in the Hackett Money Flow Report.
The futures market reflects this tightness as coffee contracts have slipped into "backwardation." Typically prices for delivery in the future are higher due to the risk associated with obtaining them, as well as storage costs for the beans. However, December coffee prices are stronger than March 2011 futures, and September is higher than July. This shows that end users of coffee are willing to pay more to quickly buy the beans rather than wait to see if prices back off.
June 22 is the first notice day for delivery of physical coffee against July coffee futures. At this point, traders can buy or sell contracts until July 20--the last trading day--to deliver or receive physical coffee from exchange stocks as their contracts dictate. The exchange listed 2.26 million 60-kilogram bags of coffee in its stocks Tuesday, down from 3.66 million bags at this time last year.
Given the scenario, it wouldn't be surprising to see end users take delivery of exchange coffee, as availability is low, Rangel said. One contract is equivalent to 37,500 pound of beans, worth $59,765 in total using Tuesday's close as an estimate. Due to higher prices on the cash market, ICE coffee stocks have been dwindling. Some analysts note the high-quality arabica beans are likely a few years old.
A sudden correction could occur if traders decide to take partial profits, Hackett said in the letter.
"It's gotten a bit ahead of itself," Rangel said. "An 18% move in three days is statistically an extreme."
Futures could correct back to the $1.40, which was breakout point for the rally, Rangel said.
ICE coffee warehouse stocks decreased by 5,936 60-kilogram bags Wednesday to total 2.25 million bags, according to exchange data.
ICE coffee open interest--the number of active positions left at the end of the session--increased by 1,145 lots Tuesday to total 151,217 lots, according to exchange data.
Volume was estimated at 38,274 lots, according to exchange data. In options,
approximately 13,120 calls and 10,312 put options traded.
ICE Change Range Liffe
Jly $1.5875 +0.60c $1.5665-$1.6225 $1,563 +$12
Sep $1.5960 +0.35c $1.5760-$1.6295 $1,566 -$ 4
-By Holly Henschen, Dow Jones Newswires; 212-416-2138;
holly.henschen@dowjones.com
(END) Dow Jones Newswires
06-16-10 1458ET
Copyright (c) 2010 Dow Jones & Company, Inc.
Nearby July coffee settled 0.60 cent, or 0.4%, lower at $1.5875 a pound on ICE Futures U.S. The contract hit $1.6225 during the session--the strongest price for a nearby contract since March 6, 2008. Coffee prices have rallied 20% since June 7 in a chain reaction of buying amid tight supplies, technical cues and general market-specific fervor that several analysts have referred to as "perfect storm" conditions. The market barely moved 10 cents in two months, and
then shot up 26 cents in six days.
Now traders are on the edge of their seats for the next clue to the market's direction.
"You have a very quiet, uneasy consolidation," said Luis Rangel, vice president for commodities derivatives at ICAP Futures in Jersey City, N.J. "The market's very gun-shy here."
Several market participants said coffee's jump was sparked last week by a big agricultural trading house. The firm held short positions in the U.S market, as well as on London's NYSE Euronext's Liffe, to lock in prices for the coffee it promised to deliver to roasters. The firm then decided to buy those offerings back to erase their responsibility to deliver beans. This set off a chain reaction among speculative investors who were betting that prices would fall further. They, too, were forced to buy to cut their losses. At the same time, the sharp spike attracted buying from bullish traders who anticipated prices would continue their move higher.
The move comes against a backdrop of depleted world stockpiles. Global stockpiles of both premium arabica and cheaper robusta beans, grown in countries such as Vietnam, are falling. Earlier this month, the International Coffee Organization revised down its forecast for world coffee output in the 2009-10 season by 1.1% to 120.6 million bags, each weighing 60 kilograms, due to disappointing harvests in Africa, Central America and Mexico. Consumption is pegged at 134 million bags.
Coffee futures held in a 10-cent range since January as traders expected a bumper crop from Brazil to alleviate the tight supplies of the high quality mild washed arabica beans traded on ICE. Those beans have been in increasingly short supply for nearly two years after back-to-back El Nino-related weather events stymied harvests in Colombia, Central America and Mexico.
Brazil is the world's largest coffee producer and No. 2 consumer behind the U.S. The coffee crop for the year ending June 2011 is forecast to be 23% higher at 55.3 million bags, according to a U.S. Department of Agriculture report.
Some industry estimates peg production at as high as 60 million bags. Roughly half of those beans are arabica, but industry members estimate only about 10% of them qualify as the high-grade "washed" variety that is demanded for premium blends.
"The low-quality nature of the current Brazilian coffee crop harvest is not going to be able to alleviate the extreme scarcity of high-quality, mild washed arabica," said Shawn Hackett in the Hackett Money Flow Report.
The futures market reflects this tightness as coffee contracts have slipped into "backwardation." Typically prices for delivery in the future are higher due to the risk associated with obtaining them, as well as storage costs for the beans. However, December coffee prices are stronger than March 2011 futures, and September is higher than July. This shows that end users of coffee are willing to pay more to quickly buy the beans rather than wait to see if prices back off.
June 22 is the first notice day for delivery of physical coffee against July coffee futures. At this point, traders can buy or sell contracts until July 20--the last trading day--to deliver or receive physical coffee from exchange stocks as their contracts dictate. The exchange listed 2.26 million 60-kilogram bags of coffee in its stocks Tuesday, down from 3.66 million bags at this time last year.
Given the scenario, it wouldn't be surprising to see end users take delivery of exchange coffee, as availability is low, Rangel said. One contract is equivalent to 37,500 pound of beans, worth $59,765 in total using Tuesday's close as an estimate. Due to higher prices on the cash market, ICE coffee stocks have been dwindling. Some analysts note the high-quality arabica beans are likely a few years old.
A sudden correction could occur if traders decide to take partial profits, Hackett said in the letter.
"It's gotten a bit ahead of itself," Rangel said. "An 18% move in three days is statistically an extreme."
Futures could correct back to the $1.40, which was breakout point for the rally, Rangel said.
ICE coffee warehouse stocks decreased by 5,936 60-kilogram bags Wednesday to total 2.25 million bags, according to exchange data.
ICE coffee open interest--the number of active positions left at the end of the session--increased by 1,145 lots Tuesday to total 151,217 lots, according to exchange data.
Volume was estimated at 38,274 lots, according to exchange data. In options,
approximately 13,120 calls and 10,312 put options traded.
ICE Change Range Liffe
Jly $1.5875 +0.60c $1.5665-$1.6225 $1,563 +$12
Sep $1.5960 +0.35c $1.5760-$1.6295 $1,566 -$ 4
-By Holly Henschen, Dow Jones Newswires; 212-416-2138;
holly.henschen@dowjones.com
(END) Dow Jones Newswires
06-16-10 1458ET
Copyright (c) 2010 Dow Jones & Company, Inc.
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