Coffee Futures Climb on Brazilian Supply Concerns; Sugar, Cocoa Advance

By Elizabeth Campbell and Chris Kay - Sep 23, 2010 11:21 AM GMT-0300 Thu Sep 23 14:21:08 GMT 2010

Coffee futures climbed on concern that a lack of rain will reduce crop prospects in Brazil, the world’s largest producer. Sugar and cocoa gained.

Brazil had dry weather since April and needs rain this month as coffee trees start flowering to produce beans for next year’s harvest. In the seven days starting Sept. 30, as much as 200 millimeters (7.9 inches) of rain may fall, said Expedito Rebello, the head of research at the government’s Meteorology Institute, known as Inmet.

“We had a dry weather pattern which was very, very worrisome for some people,” said Rodrigo Costa, the vice president of institutional sales at Newedge USA LLC in New York. “The market is waiting for a confirmation that we’re going to see rains in a regular way that usually takes place from October on.”

Arabica coffee for December delivery advanced 0.7 cent, or 0.4 percent, to $1.8065 a pound at 10:16 a.m. on ICE Futures U.S. in New York. Before today, the commodity jumped 32 percent this year.

Robusta-coffee futures for November delivery gained $18, or 1.1 percent, to $1,714 a metric ton on NYSE Liffe in London. Earlier, the price reached $1,727, the highest level for a most- active contract since Aug. 24.

“Unrest persists on the coffee market,” Commerzbank AG said in a report. “We are seeing daily changes in the key estimates of the impact of the drought in Brazil and whether the forecast rainfall will be enough to prevent substantial damage to the crops.”

Brazil Forecast

Brazil may harvest 47.2 million bags this year, more than last year’s 39.5 million bags, as trees entered the higher- yielding half of a two-year cycle, the Agriculture Ministry’s forecasting agency said on Sept. 9.

Crops in Brazil may be hurt by hail next week as a cold- weather front approaches major producing regions, Inmet’s Rebello said.

Refined-sugar futures for December delivery rose $3, or 0.5 percent, to $610 a ton in London. Raw-sugar futures for March delivery rose 0.05 cent, or 0.2 percent, to 23.24 cents a pound in New York.

Cocoa futures for December delivery gained $23, or 0.8 percent, to $2,785 a ton in New York.

In London, cocoa futures for December delivery was little changed at 1,887 pounds ($2,960) a ton.

Coffee Report - Here comes the rain… - Tuesday, September 21, 2010

The FOMC said the “pace recovery in output and employment has slowed in recent months”, inflation
levels are low, or better saying “below those judged consistent”, and finally repeated that the
committee is prepared to provide addition accommodation if needed.
As a result, two-year treasury yield went down to all time low, gold surged to all time highs, and the dollar weakened.
Yesterday (Monday) the National Bureau of Economic Research (NBER) said the US recession ended in
June 2009, the longest in the post war period (18 months), but unfortunately those without a job
– and the rate has been high for the longest span as well – do not feel like things are better.
Year to date the stock market in US is in positive territory, besides trading-volumes being below
average, while commodity indices are slightly unchanged. Among individual commodities coffee is
the leader with 34.53% gain, followed closely by cotton 34.51% rise, and wheat 32.59% surge. The
biggest losers are natural gas, down by 29.29%, cocoa off 15.51% and sugar that lost 11.73%.
After our last report, two weeks ago, the “C” has tried twice to break the US$ 200.00 cents/lb
level without success, and with the dry weather pattern now being broken by higher humidity
levels and today’s rains in part of the coffee belt in Brazil, prices started to
discount the drought-premium it had built. Weather forecasters are seeing more rains for the end
of September and beginning of October, which if confirmed could take another toll on prices.

Technical focus: Monday’s fall took NY below the 20-day-moving-average and today’s action could
not take it back up. The uptrend channel support was also broken and if the market does not
manage to consolidate above 180.00 more sells-stops will be triggered below 179.60. Funds’
position should probably be around 30K lots netlong, meaning a lot more longs could be
liquidated. LIFFE is holding near its recent high, but only a move above 1700 could really
attract more buyers, while key support is at 1570.

Fundamental focus: Colombia is just about to start its harvest and differentials have gone almost
20 cts lower in the last two weeks. Other-mild producers are getting ready to start the crop as
well, but it does not mean that coffee will be available in good quantity in less than a month.
The only potential origin to sell, Brazil, has taken advantage of higher board levels and
certainly it will not participate on the selling at lower levels (yet) – meaning diffs will get
tighter. While rains in Brazil are welcomed and needed, it was excessive in CAM and Colombia, but
it has stopped now after sadly causing huge damages to Guatemala’s population. Coffee trees have
also being damaged by the high moisture level, and it seems like there will be some loss for the
upcoming crop. We have not heard though of any major production losses. On the robusta side
Vietnam’s crop is being officially mentioned to be around 18 mln bags, but the trade community is
working with a 19.5 mln crop, slightly higher. Certified coffee in US has broken the
psychological 2 mln bags barrier, and as I mentioned here a couple of moths ago I believe it will
be near 1.5mln bags by year end as the drawdown will continue and no new coffee will be
delivered. The dollar weakness could eventually attract more buying of commodities and other
assets, but at the same time with no inflation-risk the macro players might not increase their
position.
I think the short-term is vulnerable to the downside, and it would not be surprising to see the
“C” sliding another 13 cents to test 170.00…

The Conclusion
Implied volatility is giving the impression that not much change is expected for the board, but
the open interest of the 170 put could cause some damage for bulls, while a move above 205.00
would put in danger those without protection.
As we get closer to mild-coffee harvest in CAM and Colombia, higher prices should start to bring
more price fixation and differentials have already started to easerecently.
The fear of drought in Brazil has proven to be early as rains are starting just when it should,
but certainly it is needed to be regular from now on. As a result of the rains that fell in South
of Minas and the forecast of more rains coming this week and at the beginning of October,
NY commenced a correction, that could take the market further down.
Bulls are betting that commercial buying will provide good support, but I doubt it will be enough
if funds are to drop 1/3 of their position quickly.
Since London has not followed much NY on the way up, it might be limited on the downside, even
though it seems like there is plenty of fixation that needs to be done for the new crop in Vietnam.
I am bearish on the short-term.

We shall see.
Best regards,
Rodrigo Costa

Coffee Rally Peaking As Funds Pare Bets on Surplus Up 500%

By Debarati Roy - Sep 13, 2010 3:51 PM GMT-0300 Mon Sep 13 18:51:21 GMT 2010

A file photograph shows a coffee shop employee as he pours coffee beans into a grinder at a Cafe Coffee Day outlet in New Delhi. Photographer: Amit Bhargava/Bloomberg

Robusta coffee beans are seen at a warehouse and factory in Hanoi on December 8, 2009. Photographer: Jeff Holt/Bloomberg

The biggest rally in coffee in five years may be ending as the prospect of larger harvests spurs hedge funds to pare bets on higher prices, potentially cutting costs for J.M. Smucker Co., Kraft Foods Inc. and Starbucks Corp.

Supplies of arabica, the world’s most-grown coffee, will exceed demand by 6.67 million 60-kilogram (132-pound) bags in the year ending in September 2011, according to ABN Amro Bank NV and VM Group. That’s the most in nine years and more than six times this season’s expected surplus. Speculators including hedge funds cut their net-long position, or bets on higher prices, by 8.4 percent since Aug. 17, regulatory data show.

The rise in coffee coincided with surging food prices as flooding in Canada and drought across Russia and Europe ruined crops. Wheat as much as doubled since June, contributing to riots over bread costs in Mozambique, and a United Nations price-index of 55 foods advanced to its highest since September 2008 last month. No such shortages in arabica are forecast, with ABN Amro and VM Group anticipating a 7.4 percent increase in output to almost 86 million bags, the most since at least the season ended in 2001.

“You cannot justify the spike on the upside if you look at the supply situation,” said Christoph Eibl, co-founder of Zug, Switzerland-based Tiberius Group, which manages more than $2 billion in assets. “People who have been betting on coffee may lose. In the long run, fundamentals always overrule.”

Arabica Gains

Arabica rose as much as 50 percent since June 7 in New York trading, reaching a 13-year high of $1.9865 a pound on Sept. 8, partly on speculation that rainfall in Colombia, the second- biggest producer after Brazil, would damage crops. Colombian coffee output gained 55 percent to 615,000 bags in August, the Bogota-based National Federation of Coffee Growers said this month.

Coffee will average $1.52 a pound in the fourth quarter, or 20 percent less than now, according to the median in a Bloomberg survey of seven analysts. Arabica for December delivery declined 0.65 cent, or 0.3 percent, to settle at $1.8915 at 2 p.m. in New York, declining for the third straight session.

Speculators accumulated a net-long position of 44,505 contracts by Aug. 17, Commodity Futures Trading Commission data show. That’s almost three times the five-year average and equal to 1.67 billion pounds of coffee. They cut that in two of the last three weeks, to 40,757 contracts by Sept. 7.

The last time prices rose this fast, in a rally ending in March 2005, arabica slumped 38 percent in the next six months. Futures traded on the ICE Futures U.S. exchange are anticipating a decline next year. Contracts from March 2011 are in backwardation, meaning that nearby contracts are trading at a premium to longer-dated ones, a sign investors may be more concerned about near-term supply.

Cutting Costs

Cheaper beans could help cut costs for companies including Northfield, Illinois-based Kraft, which raised U.S. prices twice since May on some types of Maxwell House and Yuban coffee. Starbucks, the world’s largest coffee-shop chain, said Aug. 17 that more spending on commodities, mostly coffee, would add about 4 cents a share to expenses in the year ending in September 2011.

Smucker, based in Orrville, Ohio, said Aug. 3 that it raised prices by an average of 9 percent for most of its Folgers and Dunkin’ Donuts coffee products. In a conference call with investors on June 17, Vince Byrd, president of Smucker’s coffee business, said the rally was being driven more by funds than supply issues. Arabica had already climbed about 20 percent by then. The company declined to comment further.

Shares of Seattle-based Starbucks are 12 percent higher this year in New York trading, while Kraft gained 14 percent and Smucker dropped 1.7 percent.

Commodity Demand

Higher prices for commodities including coffee, oil and natural gas helped strengthen the Colombian peso and Brazilian real against the dollar in the last 12 months. The peso rallied 11 percent against the U.S. currency, and the real is up 5 percent, trimming returns from dollar-denominated exports.

“The stronger peso takes a little of the shine off,” said Rupert Stebbings, head of the Medellin-based unit of Chilean brokerage Celfin Capital SA. “It’s eroding some of the gains, but this is a coffee price level they couldn’t have imagined.”

While harvests may expand, supply now is still tight, said Nestor Osorio, the outgoing executive director of the London- based International Coffee Organization. Declining inventory “makes the markets much more nervous and much more vulnerable,” he said.

Stockpiles in warehouses monitored by ICE Futures U.S. fell 35 percent this year to 2.01 million bags, the lowest level in more than a decade. This season’s arabica surplus will be 1.01 million bags, the smallest amount since the 2007-2008 season, according to ABN Amro and London-based VM Group.

Coffee Fungus

Problems with crops may also spill over into next season. Colombia’s harvest could decline next year after wet weather caused the worst outbreak of a plant-damaging fungus in a quarter century, Jose Sierra, who represents Antioquia, the nation’s largest coffee-growing province, said Sept. 1.

Speculators added 3,058 contracts to their net-long position in the week ended Sept. 7, the day before futures reached a 13-year high. Prices fell for two consecutive days after that, retreating 2.4 percent.

Prices may keep rising as supplies increase because demand will also climb, said Judith-Ganes Chase, a former Merrill Lynch & Co. analyst who runs a consulting firm in Katonah, New York. Global demand for arabica will expand 0.4 percent to 79.32 million bags in the 2010-11 season, the highest since at least the 2000-2001 season, ABN Amro and VM Group estimate.

Staple Foods

Unlike staple foods such as grains, coffee drinkers may not be willing to pay higher prices, said Raymond Keane, a coffee trader for Balzac Bros. & Co. in Charleston, South Carolina, which supplies the commodity to Kraft and Starbucks.

“There will be a point when consumers say: ‘This is it,’” Keane said. “Coffee is not an important ingredient of our diet. It is not wheat or rice. It’s dispensable.”

Speculation about Colombia’s crop is probably too bearish, said Abah Ofon, a Dubai-based commodity analyst at Standard Chartered Plc, the most accurate arabica forecaster tracked by Bloomberg in the first quarter. Ofon is forecasting a 1.5 million-bag increase in the country’s harvest, for a gain of 19 percent, and fourth-quarter prices of $1.45.

Brazilian production will rise to a bigger-than-expected 47.2 million bags this year, from 39.5 million last year, the Agriculture Ministry’s crop-forecasting agency said Sept. 9.

Arabica Prices

Roasters may also seek to substitute some arabica with robusta, used in instant coffee and espresso blends, said Keane of Balzac Bros. Arabica is trading at 2.6 times the price of robusta, compared with a two-year average of twice as expensive, data compiled by Bloomberg show.

“We’ve seen some international companies ask for more robusta than they used to,” said Bui Hung Manh, head of the business department at Tay Nguyen Coffee Investment, Import and Export Co. in Buon Ma Thuot, Vietnam. “If arabica prices stay as high as they are now, more people will switch to robusta.”

The company is the biggest exporter in Vietnam, the world’s largest producer of robusta. The country will produce 20 million bags of robusta next season, a gain of about 8 percent, ABN Amro and VM Group estimate.

Robusta traded on the NYSE Liffe exchange in London rose to a 21-month peak of $1,838 a metric ton on Aug. 23, before slumping 15 percent.

“When the price trend reaches a crescendo, there are clear signs that an imbalance has built up,” said Peter Sorrentino, who helps oversee $13.3 billion at Huntington Asset Advisors in Cincinnati and correctly predicted the collapse in commodity prices in 2008. “Financial buyers are finally becoming wiser.”

Coffee Slides Most Since 2008 on Concern Economic Recovery is Faltering

Coffee declined the most in more than two years as equities tumbled on concern that the economic recovery may be weakening, driving most commodities lower.

The Reuters/Jefferies CRB Index of 19 raw materials plunged as much as 1.4 percent, which would be the biggest drop since June 29, and oil fell below $72 a barrel for the first time in almost seven weeks. Yesterday, coffee reached $1.8865 a pound, the highest level since Sept. 11, 1997.

“There is long liquidation after the market rose to a new high,” said Boyd Cruel, a senior analyst at Vision Financial Markets in Chicago. “The weakness in the equity markets is also adding selling pressure.”

Arabica coffee for December delivery slumped 12 cents, or 6.6 percent, to $1.7125 a pound at 9:47 a.m. on ICE Futures U.S. in New York. A close at this price would mark the biggest decline for a most-active contract since March 2008. Before today, the commodity advanced 35 percent this year on concerns that demand would outpace supplies.

On London’s Liffe exchange, robusta-coffee futures for November delivery retreated $147, or 8.3 percent, to $1,630 a metric ton, the biggest drop since at least January 2008.

A lower close after a high is a “very negative signal,” according to Doug Whitehead, an analyst at Rabobank International in London. “With such a weak technical signal, you would think that would prompt additional selling, as producers and traders might find prices could head lower for the next few days.”

The Dow Jones Industrial Average and the S&P 500 Index dropped both dropped as much as 1.4 percent.

Coffee futures flirt with 13-year high on crop troubles

Retail price hikes lag, but supermarket prices could rise up to 10%

A previous version of this story incorrectly characterized Monday's settlement for coffee futures as the highest since September 1997. The story has been corrected.

SAN FRANCISCO (MarketWatch) -- Arabica coffee futures came off a nearly 13-year high on Monday, but traders say tight supplies are likely to keep prices of the better-quality bean elevated.

Coffee prices have increased 34% this year as recent crops from Colombia and countries in Central America were dogged by poor weather. Concerns about Brazil's upcoming crop also pulled in buyers.

Reuters

As prices soar in the futures markets, U.S. coffee producers have been bracing for higher coffee purchase costs. Some have already increased their prices.

Demand for coffee, however, is generally seen as impervious to higher prices -- coffee drinkers usually only change their purchasing habits if prices rise significantly.

Coffee for December delivery, the most active contract, declined 2 cents, or 1%, to settle at $1.83 a pound on ICE Futures U.S. on Monday. Earlier, they rose to an intraday high of $1.89 a pound.

They settled at $1.85 a pound on Friday, the highest settlement since September 1997. Coffee prices hit a record in May 1997, when prices hit $3.18 a pound.

A small exchange-traded note that tracks coffee futures, the iPath Dow Jones UBS Coffee Subindex Total Return ETN /quotes/comstock/13*!jo/quotes/nls/jo (JO 46.93, -2.62, -5.29%) , by Friday had topped Morningstar's list of best-performing exchange-traded fund, excluding leveraged ETFs, over the past three months. Read ETF Investing blog on coffee futures.

"I do think coffee has a very, very good chance of hitting $2 a pound," said Sterling Smith, an analyst with Country Hedging Inc. in St. Paul, Minn.

Supplies from Colombia are still tight, and it's not clear whether the Brazilian crop can lessen concerns about the precarious supply situation overall, he said.

Moreover, coffee is a cyclical crop, and even-year crops are usually smaller than odd-year crops, he added.

Prices gained earlier Monday as traders worried about Tropical Storm Danielle bringing more rain to Mexico and Central America. But Danielle, likely to be upgraded to a hurricane later on the week, is expected to miss most of the key coffee-growing regions in Mexico and nearby.

Richer brew

Americans don't seem to worry about paying more for coffee, Smith said. Demand cools as prices rise in most commodity markets, but coffee consumption only gets hit if prices increase "a great deal," he added.

He estimated that prices would have to run up to $3 per pound to cause Americans to stop buying as much coffee or start migrating to cheaper brands.

Higher prices already are a reality. J.M. Smucker /quotes/comstock/13*!sjm/quotes/nls/sjm (SJM 59.23, -0.57, -0.95%) , best known for its namesake jams, boosted retail prices by 9% for its Folgers, Dunkin' Donuts and Millstone coffee brands this month. This followed a 4% increase in May.

Kraft Foods (KFT 29.25, +0.10, +0.33%) raised prices for its Maxwell House ground coffee by 30 cents and instant coffee by 2.5 cents, on average. Sara Lee (SLE 14.65, -0.10, -0.65%) said it was raising prices but didn't specify the brands, which include Douwe Egberts and Senseo.

"We expect to see specialty coffee roasters begin raising prices later this year, as lower-priced coffee inventory is cycled," said Mitchell Pinheiro, analyst at Janney Capital Markets. "Retail coffee prices generally move in step with green coffee."

At the onset, rising commodity prices squeeze coffee producers more than the retail customer.

According to the USDA, a 10-cent increase in green-coffee bean prices, on average, trickles down to a 2-cent increase in both manufacturer and retail prices. But if the increase persists through several periods, prices rise about cent-for-cent with the commodity.

Senior market analyst Bill Patterson, with Mintel International Group, sees coffee price tags at supermarkets going up 9% to 10%.

"Whatever is going on at Kraft and Smucker, I'd be really surprised if the food service won't be forced to raise prices as well," he said. "They made the decision knowing others will follow."

Starbucks /quotes/comstock/15*!sbux/quotes/nls/sbux (SBUX 22.99, -0.69, -2.91%) said Aug. 17 it would swallow 4 cents a share in additional commodity costs in fiscal 2011, primarily due to higher coffee prices. The coffee chain noted that its purchase costs aren't necessarily linked to the commodities market because of its contracts with growers around the world.

In its Aug. 2 quarterly regulatory filing, Starbucks said it had committed to purchase an estimated $285 million of green coffee under price-to-be-fixed contracts as of June 27. Starbucks sells its premium bagged coffee at its own stores and at supermarkets, where it recently started to make an even bigger push with its Via instant coffee packets.

Retail chain and foodservice distributor Peet's Coffee & Tea (PEET 35.34, +0.32, +0.91%) said Aug. 3 it has no plans to raise coffee prices this year. At supermarkets, its packaged coffee sells at a 10% premium to other specialty coffees.

But CEO Patrick O'Dea did say Peet's would consider price increases if coffee-future prices sustain a run-up in price over the next six to nine months.

For 2010, Peet's said its coffee purchase costs will be up 2%. In January, the company had expected coffee costs to decline 1%. This price swing will "put about $1 million of cost pressures" on the balance sheet starting in the third quarter, the company has said.

Caribou Coffee Co. (CBOU 9.54, -0.02, -0.21%) said Aug. 4 it fixes the price of its green coffee contracts 12 months in advance and was able to buy coffee at costs lower than current market prices. The coffee chain said it has enough inventory through March 2011.

Rain blamed for tighter supplies

Like the recent rally in wheat prices, coffee's recent surge has stemmed from poor crop production.

Excessive rains and a cyclical rejuvenation of coffee plants have cut into Colombia's crop, which has been about 30% smaller than usual.

Colombia is the world's second largest coffee producer after Brazil, which produces about half of the world's Arabica coffee beans, the most sought-after and highest quality type of beans.

Robusta beans, mostly harvested in Asia, usually go to production of instant coffee or into cheaper coffee blends.

Concerns that Brazil is about to face dry conditions also contributed to the recent price increases.

Brazil had its own problems with last year's crop, affected by rain, said Marcio Bernardo, an analyst with Newedge USA. But even if the drought comes, coffee is a hardy plant that can tolerate some dry conditions and rains later in the season usually don't affect it, he said.

Fundamentals don't quite justify the latest price run-up, but then again the coffee market, like other commodities, is awash with speculative money making it difficult to predict where prices will go, Bernardo said.

Demand for coffee is increasing globally, Country Hedge's Smith said.

For years, Brazil grew most of the world's coffee but Brazilians, although heavy coffee drinkers, had only a passing interest in the choicest beans, which would end up exported.

That has changed as more Brazilians can afford coffee and more people have become more particular about their coffee. This trend could lead to continued higher prices in the long term as more of the best Arabica bean stays in Brazil, Smith said.

Claudia Assis is a San Francisco-based reporter for MarketWatch. Matt Andrejczak is a reporter for MarketWatch in San Francisco. Cynthia Lin is a MarketWatch reporter based in New York.

CRB Research Team Of Commodity Research Bureau

Coffee - July 23 2010

CRB Research Team of Commodity Research Bureau - IF - Fri Jul 23, 3:08PM CDT

Coffee prices are trading sideways moderately below last month's 12-year high. Bearish factors include (1) ICO's estimate for Brazil's coffee output to rise to 50 mln bags in the year starting Oct 1, up +27% y/y, and (2) ICO's prediction that global coffee output may rise 12% to 135 mln bags next season. Bullish factors include (1) tight supplies as coffee inventories monitored by ICE have fallen -30% this year to an 8-year low, and (2) ICO's prediction that 2010 global coffee exports will drop below last year's 95.5 mln bags amid "scarcity."

Fundamental Outlook-Bull Market Correction-

Coffee prices are correcting from a recent 12-year high as the market adjusts to a possible bumper crop from Brazil. Coffee fundamentals remain bullish due to tight supplies combined with strong consumption and lagging production. Coffee production in 2009/10 fell -5.9% y/y to 120.6 mln bags (ICO), but production should rebound to 133-135 mln bags in 2010/11 (ICO). Brazil's 2010/11 (July-June) production will rise 23% y/y to 55.3 mln bags on their favorable 2-yr cycle (USDA).

Coffee Supply/Demand USDA:

2010-11 world coffee production a record 139.7 mln bags (+11% vs 2009-10's 125.7 mln bags); 2010-11 consumption 131.5 mln bags (+2.2% vs 2009/10's 128.7 mln bags); 2010-11 world ending stocks at 36.3 mln bags (+16% vs 2009-10's 31.3 mln bags); exports 103.4 mln bags (+5.2% vs 2009/10's 98.3 mln bags); 2010-11 stocks/use 27.6% (vs 2009-10's 24.3%).

Brazil Coffee Trade Sees Uptick As Prices Climb

SAO PAULO, Jul 22, 2010 (Dow Jones Commodities News via Comtex) -- Brazil's coffee trade saw an uptick on Thursday as international and local bean prices climbed.

Nearby September coffee on ICE Futures U.S. jumped 4.40 cents, or 2.8%, to settle at $1.6170 a pound on Thursday on speculative fund buying linked to bullish chart factors and a widespread commodity rally.

This upswing followed days of world prices plunging downward, to five-week lows on Wednesday.

"Trade in Brazil only picked up as prices rallied late on Thursday," Harris Haase, a trader at coffee exporter Comexim in Santos, told Dow Jones Newswires.

Buying and selling in Brazil, the world's largest coffee producer, has been slow this week as international and local coffee prices fell, Haase said.

Haase said a good arabica coffee, type six, in southern Minas Gerais state, the No. 1 coffee-growing region, on Thursday was trading at between 300 Brazilian real ($170) and BRL310 per 60-kilogram bag. This compared to BRL300 per bag earlier in the week and BRL320-BRL330 per bag a week ago.

Trade remained light, however, as buyers and sellers in Brazil remain cautious due to a raft of conflicting indicators. Favorable weather in Brazil for its cyclically large coffee crop potentially should trim prices.

Continuing concerns about Central America and Colombia's crop size and the razor-tight supply of fine mild coffees should elevate prices. External factors such as economic uncertainty also further cloud the picture.

Gil Carlos Barabach, a coffee analyst at Safras, said trade remains light this week. Trade was done on Thursday at around BRL305 per bag, after the ICE market hit lows on Wednesday, he said.

Trade for scarce fine washed coffees was being done at BRL360 per bag on Thursday, Barabach said. But the supply remains tight.

Brazil's farmers have harvested more than 50% of the arabica beans and as a result they are well capitalized. "They can afford to wait and see if prices improve," he said.

A trader at Swiss Coffee House in Minas Gerais state said a good Swedish arabica coffee saw buyers hunting for differentials of 26-28 points under the December coffee contract on ICE. Sellers wanted 21-22 points under the same contract, with little trade being done, he said.

The Brazil coffee harvest began in May and will run through September.

Brazil is the second-largest coffee-consuming country, behind the U.S.

Colombia 2H Coffee Output Seen At 6M Bags - Fedecafe

BOGOTA, Jul 22, 2010 (Dow Jones Commodities News via Comtex) -- Colombia's coffee output in the second half of this year will likely reach 6 million sixty-kilogram bags, the General Manager of Colombia's National Federation of Coffee Growers, or Fedecafe, said Thursday.

"We still look at output with optimism and we expect output to be much higher than in the first half of the year," Fedecafe's top official, Luis Genaro Munoz, told reporters Thursday.

Output in the first half of this year was 4.0 million bags.

Finance Minister Oscar Ivan Zuluaga said the total output for this year will likely reach 10 million bags. Earlier this month, Munoz had said the output would be between 10 million and 10.5 million bags.

Munoz also said both the general price of coffee and the price of mild Colombian coffee will stay stable. He said the market would absorb the expected increase in Colombia coffee supply without impacting prices as the demand for coffee is rising faster than output.

The gap between global demand and supply is likely to be around 5.8 million bags this year, he said.

Inventories around the world are at a record low.

Colombia is the world's largest producer of mild washed arabica coffee. Total output had fallen 32% in 2009 compared with 2008 to 7.8 million bags. Colombia was the fourth-largest producer overall after Brazil, Vietnam and Indonesia in the 2008-09 crop cycle.

ICE Coffee Seen Bullish In 2011 - Analyst

1151 EDT [Dow Jones] - The coffee market remains "extremely bullish," despite the incoming bumper crop from Brazil, says Shawn Hackett in the Hackett Money Flow Report. In 2011, Brazil's 2011 harvest will be at the weak end of the biennial crop cycle, adding to to another global supply deficit, Hackett says. "I would look buy coffee on any break to the $1.50 a pound area on the December futures contract. However, if the coffee market has a weekly close above the $1.65 area, then buy anyway as prices could straight spike to well over $2.00 a pound, Hackett says. (HEH)

Scarcity Vs. Starbucks: Going Cuckoo For Coffee

It's hard to find a commodity rallying harder in the short term these days than coffee. Spot coffee, as measured by the S&P Spot Coffee Index, is up nearly 20 percent year-to-date, and up almost 25 percent since its lows in April. In contrast, you could pick any major commodity index and find it's down for the year: The Goldman Sachs Commodity Index is down 12 percent; the DJ-UBS Commodity Index is down 9.8 percent and even the GreenHaven Continuous Commodity Index is down 4.8 percent.

Going back over the past two years, you'll find coffee's been one of the only solid performers in commodities:

The pale blue line labeled "KC1" shows front-month coffee futures up 13 percent since July 2008, while the red line, which represents the GSCI Index, is down a crippling 62 percent and change.

Of course, investing in coffee hasn't been without its costs. Like many commodities, coffee often trades in contango, i.e., tomorrow's contract is more expensive to own than today's. As a result, the long coffee investor has had to pay the contango-piper each month they've rolled their position forward. You can see that ding in the dark blue line on our chart: the iPath Dow Jones-UBS Coffee ETN (NYSEArca: JO). As you can see, while JO is still up a healthy 15 percent and has certainly performed better than the broader commodities markets, JO has still lost money over spot coffee prices.

Scarcity Vs. StarbucksWhat's behind the pop in coffee prices is relatively easy to explain, and it all comes back to supply and demand.

According to the USDA, the demand picture for coffee remains strong:

Global Coffee Demand


With the exception of a minor hiccup during the 2008 financial crisis, when we all switched from coffee to hard liquor to calm our nerves, global coffee drinkers have become insatiable. The actual amount of coffee consumed in less than 10 years has more than doubled.


Farmers, on the other hand, can only do so much to keep up:

Global Coffee Production


So as you might expect, the end result is that there's far less of the magic bean available to turn into actual drinkable coffee. Indeed, where the world used to have years' worth of coffee supplies sitting in stockpile, now those inventories have dwindled to mere months.


Global Coffee Stocks: Days-to-Use



This increasingly tight inventory situation has led to increased price sensitivity to production shocks. If a year's worth of coffee were on hand in the warehouses, the market could easily absorb a minor disruption from any major coffee producer. But with stocks so low, the slightest provocation can send futures traders into a buying frenzy.


Coffee's Future

So how extreme will the situation get?Well, demand is clearly higher than supply at the moment, and even a momentary surprise in the record size of Brazil's crop this year won't be enough to dampen the long-term dynamics. At the same time, the "scarcity" threat has long since been priced into the market. So all told, we've seen a substantial shift in how the commodities markets are thinking about coffee.

Consider the persistent (and near-eternal) contango in the coffee market:


Futures Curves

From left to right, this shows the futures curves in 2007, 2009, six months ago and today (as shown by the top black line). While you can clearly see the massive demand increase over the past few years reflected in the ever-rising mean of each curve, the overall structure remained intact: contango, contango, contango. That is, until now. For the first time in recent memory, the front-month roll is the only roll that will cost you, and investing further out on the curve actually implies that you think today's prices are abnormally high; that is, you're better off buying next year's coffee today, rather than storing it up for a rainy day.

More than any supply and demand figures, this structural shift in the curve makes me think that this time, something is different in the coffee markets. That's good news for some investors; i.e., those working and rolling positions further out on the curve. For the moment, however, JO investors are still stuck paying that front-month contango tax.

But next month? Maybe this time it really is different.

Written by Julian Murdoch
July 12, 2010 11:56 am EDT

Coffee Prices May Decline 10% to $1.45 by September on Brazil Record Crop

Arabica coffee prices may fall 10 percent by September when Brazil, the world’s biggest producer of the beans, finishes harvesting a record crop and adds its beans to the market, said consulting firm Safras & Mercado.

Coffee futures may drop to $1.45 a pound on ICE Futures U.S. in New York by September from today’s $1.615 a pound at 11:56 a.m. local time, Gil Barabach, a coffee analyst with the Porto Alegre, Brazil-based firm, said in a telephone interview. Futures may rebound to $1.60 by year-end on a tight world supply, he said.

Prices of the milder variety, preferred for specialty beverages such as those made by coffee chain Starbucks Corp., climbed to a 12-year high last month.

Brazil may harvest 54.6 million coffee bags this year, up from last year’s 43.9 million bags, Barabach said. About 52 percent of the country’s coffee crop was harvested through July 2, he said.

A bag of coffee weighs 60 kilograms (132 pounds).

Global Coffee Output May Reach 135 Million Bags in Year, Group Forecasts

World coffee production is forecast at between 133 million to 135 million bags in the 2010-11 crop year, the London-based International Coffee Organization said in an e-mailed report. Production in Brazil is estimated at about 50 million bags, the group said. Output in Vietnam is expected to be between 16 million to 18 million bags, the ICO said. A bag of coffee weighs 60 kilograms (132 pounds). Brazil is the world’s biggest producer while Vietnam is the largest grower of robusta beans.

07/07: September Rallies 3.4%, Recoups Losses

Arabica coffee futures for September delivery rallied Wednesday, as bullish chart influences and the strength of key outside markets helped coffee to recoup Tuesday's sharp losses.

Most-active September coffee rose 5.40 cents, or 3.4%, to settle at $1.6305 a pound.

A combination of speculative buying and traders buying back previously sold positions lifted coffee, with an additional boost provided by outside market strength, traders said.

A gain of 2.9% in crude oil, a steady to weaker U.S. dollar and the Dow Jones Industrial Average up 2.4% encouraged traders to buy riskier commodity investments. The major commodity indexes posted gains of 1.5% to 2.3% on the day.

"Short term, coffee was oversold the last couple days on light volume," said Alonso Tomas, a coffee trader at Hencorp Futures in Miami.

In addition, bullish charts were an influence as traders closed an upside gap on the September chart that was left from Tuesday's lower opening. The desire to fill that gap during the session provided chart-watching bulls with ammunition, Tomas said.

Coffee futures were in "recovery mode" Wednesday on sentiment that Tuesday's losses were overdone, said Jack Scoville, an analyst and vice president at Price Futures Group in Chicago.

Fundamentally, supplies of quality arabica beans remain extremely tight and hedging pressure is muted.

"There's no deliverable grade coffee around. Brazil is not a deliverable origin" against ICE futures, "even if they did meet quality standards," said
Scoville.

Brazil is the world's largest coffee grower, but its crop isn't deliverable against ICE futures, which are high-quality washed arabica beans. Poor harvests in Mexico, Colombia and Central America have left the highest-quality beans in very short supply.

Coffee output in Colombia, however, is expected to climb this year on improved growing weather.

Colombian coffee production will likely reach between 10 million and 10.5 million bags, up from 7.8 million in 2009, Colombia's National Federation of Coffee Growers, or Fedecafe, said Wednesday.

Technically, action so far this week has left a double-bottom support area in September coffee at $1.5685-$1.5705. While coffee futures could trade lower, Scoville sees downside potential limited given the tight supply situation.

"Everyone wants to get all bear-ed up, but there's no fundamental reason in ICE coffee to do that," he said.

ICE warehouse stocks fell 10,792 bags to total 2.182 million 60-kilogram bags, the exchange reported.

Total open interest on ICE fell 4,025 to total 165,787 lots. Just 188 contracts remained open in nearby July ahead of its July 20 expiration.

Futures volume is pegged at 18,602 contracts, with 6,726 calls and 3,662 put options traded.

ICE Change (cents) Range
July $1.6065 up 5.15 $1.5550-$1.6065
Sep $1.6305 up 5.40 $1.5705-$1.6395


(END) Dow Jones Newswires

Coffee Slumps to Two-Week Low on Greater Output in Brazil; Cocoa Declines

Coffee prices in New York fell the most since November on speculation that global supplies will increase as production jumps in Brazil, the world’s largest grower. Cocoa also dropped.

Brazil’s coffee output may total 47 million bags this year, up 19 percent from a year earlier, as trees enter the higher- yielding phase of a two-year cycle, according to the Agriculture Ministry. No frost is forecast for coffee-growing areas through July 9, the government’s weather agency said on its website.

“Fundamentals are bearish,” said Boyd Cruel, a senior analyst at Vision Financial Markets in Chicago. “The Brazilian crop is expected to be big, and there’s no news, like threat of freezing temperatures, to push prices up. Coffee has lost its upside momentum.”

Arabica coffee for September delivery fell 6.65 cents, or 4 percent, to $1.5765 a pound on ICE Futures U.S. in New York, the biggest loss for a most-active contract since Nov. 10. Earlier, the price reached $1.5685, the lowest level since June 18. Futures are down 11 percent since reaching a 12-year high on June 24.

On London’s Liffe exchange, robusta-coffee futures for September delivery dropped $60, or 3.5 percent, to $1,650 a metric ton, after touching $1,643, the lowest price since June 24.

Arabica coffee, a variety grown in Brazil and brewed by companies such as Starbucks Corp., may fall as low as $1.50 a pound by the end of the week, Cruel said.

Further Drop Predicted

Robusta beans, used mostly in instant coffee, are harvested mostly in Asia and parts of Africa. Each bag weighs 132 pounds, or 60 kilograms.

Arabica prices surged as much as 31 percent since the end of May to $1.765 on June 24. Robusta jumped as much as 34 percent in the same period.

“On the way up, there was a lot of panic buying and short- covering,” Angus Kerr, owner of trading company Coffee ag in Cobham, England, said by telephone, referring to purchases that closed bets on falling prices. “The market has further to come down before it consolidates.”

Cocoa for September delivery slipped $4, or 0.1 percent, to $2,967 a ton in New York. On London’s Liffe, cocoa futures for September delivery dropped 6 pounds, or 0.3 percent, to 2,394 pounds ($3,627) a ton.

To contact the reporters on this story: Yi Tian in New York at ytian8@bloomberg.net; M. Shankar in London at mshankar@bloomberg.net

Coffee Declines on Speculation Prices Climbed Too High to Reflect Demand

By M. Shankar - Jul 6, 2010

Coffee fell in New York and London on speculation prices climbed too high in recent weeks to reflect the outlook for supply and demand.

Arabica futures for September delivery slid as much as 3.5 percent to the lowest price in two weeks on ICE Futures U.S. in New York. The beans jumped more than a quarter in the four weeks through June 25, as did the harsher robusta variety traded on the Liffe exchange in London.

“On the way up, there was a lot of panic buying and short- covering,” Angus Kerr, owner of trading company Coffee ag in Cobham, England, said by phone, referring to buying of beans to close bets on lower prices. “The market has further to come down before it consolidates,” he said.

September-delivery arabica declined 3.8 cents, or 2.3 percent, to $1.605 a pound on ICE Futures U.S. at 8:42 a.m. local time. Robusta for September delivery dropped 2.9 percent to $1,661 a metric ton on Liffe, rebounding from a slide of as much as 3.9 percent, the biggest retreat since Nov. 10.

Traders yesterday exchanged 500 lots of September $1,700 robusta call options on Liffe, according to data from the bourse. They also exchanged 725 lots of September $1,700 put options and 225 lots of $1,750 puts. Calls give the right to buy a commodity at a preset price, while puts confer the right to sell.

Raw sugar for October delivery rose 0.18 cent, or 1.1 percent, to 16.88 cents a pound in New York. White, or refined, sweetener for October delivery was little changed at $502.50 a ton on Liffe.

Cocoa for September delivery slipped $1 to $2,970 a ton in New York. The chocolate ingredient for September delivery dropped 0.1 percent to 2,397 pounds ($3,635) a ton on Liffe.

To contact the reporter on this story: M. Shankar in London at mshankar@bloomberg.net

DJ MARKET TALK: ICE Coffee Slides To 11-Session Low; Funds Sell

1311 EDT [Dow Jones] - ICE arabica coffee futures are trading off of their lowest levels in nearly three weeks as speculative funds take profits.
Most-active Sep coffee is down 6.45 cents at $1.5785 a pound, off of the $1.57 intraday low. Funds are selling long positions after the market was unable to
push beyond 12-year highs hit June 24. The market is correcting as was expected, with technical support at $1.5540 and $1.5750, analysts say.
Fundamental factors are unchanged, though recent losses have sparked technical sales, one analyst notes. Liffe Sep robusta coffee settled $60 lower at $1,650
a ton. (HEH)

BULLMAN MACRO FUND PLANS TO TAKE SHORT POSITION ON ARABICA MARKET AT AROUND 172 CENTS/LB

By Sarah McFarlane

LONDON, July 2 (Reuters) - ICE arabica coffee, near 12-year highs after a blistering rally, is looking overbought and a correction could see prices shed 5 percent to trade around 158 cents a lb, hedge fund Bullman Investment Management says.

Nick Bullman, managing partner of the fund, said that although it does not currently hold a position in the arabica market, the fund plans to take a short position if the benchmark September contract rises to around 172 cents.

Prices stood at 164.90 cents by 1213 GMT.

Bullman Investment Management, a macro hedge fund with less than $100 million under management, had around 30 percent of its funds allocated to agricultural commodities in June.

"If you look at the assets which have done well year to date it's commodities like gold, treasury as a flight to safety, and some agricultural commodities," said Bullman.

"There's always demand for sugar and coffee. When you look at soft commodities they're very risk protective assets because there's always going to be a demand."

Bullman said macro funds have rotated money around the commodity and currency markets in 2010 as few assets are "working" for funds this year.

CAFFEINE HIGH

New York-traded ICE arabica coffee prices hit a 12-year high at 176.50 cents in June after a short-covering rally in London robusta coffee triggered fund buying in both the London and New York coffee markets.

Coffee and sugar have seen some of the biggest moves in the commodities complex so far in 2010, with arabica coffee rising around 20 percent year-to-date and sugar prices nearly halving from their February peak of over 30 cents a lb.

Heavy losses in sugar futures were triggered by an improved supply outlook, with 2010/11 forecast to see the first global sugar surplus following several years of demand outstripping production.

Coffee fundamentals remain unchanged, with a record crop expected from Brazil.

"Nothing has changed which would drive prices upwards. The only risk in adding short positions is the momentum has been strong on the upside," said Bullman.

"If you look at the change in non-commercial open interest it's clear hedge funds have been investing," he added.

Money managers, which include hedge funds, increased their net long positions in arabica coffee futures contracts traded on ICE Futures U.S. by 57 percent in the week ending June 22.
[ID:nN25574346]

"Macro funds are rotating through various asset classes as they become over valued or undervalued and coffee had become undervalued," said Bullman.

"Is there a possibility funds are going to rotate back out of it? Yes, absolutely." (Reporting by Sarah McFarlane; Editing by Veronica Brown and Sue Thomas)

((sarah.mcfarlane@thomsonreuters.com ; +44 207 542 5937; Reuters Messaging: sarah.mcfarlane.reuters.com@reuters.net ))
Keywords: COFFEE/BULLMAN

For Related News, Double Click on one of these codes:[C] [MTL] [GRO] [SOF] [RINVM] [M] [T] [SFTS] [COF] [INV] [DRV] [FUND] [SUG] [COM] [GRA] [AGRI] [LEN] [RTRS]
Friday, 02 July 2010 15:13:40RTRS [nLDE6610MA] {EN}ENDS

Cocoa, Coffee Decline as Sluggish U.S. Economy May Cut Commodity Demand

Cocoa prices fell, capping the biggest weekly drop since mid-May, on concerns that commodity demand will slacken amid a fragile economic recovery in the U.S. Coffee also slumped.

Private employers added fewer workers to payrolls in June than forecast, a government report today showed. The report follows data indicating weakness in the housing market and sluggish manufacturing. Cocoa dropped 4.6 percent this week and is down 9.7 percent in 2010.

“I suspect that the recent slowdown in the U.S. is weighing more on the markets than perceived,” said Dennis Cajigas, a senior market strategist at brokerage MF Global Holdings Ltd. in Chicago.

Cocoa for September delivery fell $70, or 2.3 percent, to $2,971 a metric ton on ICE Futures U.S. in New York.

Arabica-coffee futures for September delivery dropped 3.95 cents, or 2.3 percent, to $1.643 a pound on ICE Futures U.S. in New York. The price declined 2.7 percent this week.

“With the economic news lately, people aren’t buying commodities,” said Jack Scoville, a vice president at Price Futures Group Inc., a broker in Chicago.

The Reuters/Jefferies CRB Index of 19 commodities fell for the second straight day and has lost 10 percent this year.

New York trades at the highest level since February 24th 1998

-20 economies agreed on higher capital for banks and signed a compromise to reduce fiscal deficit by 2013. In the US, the Volcker-rule was approved, but a slightly different version that gives banks some trading room and funds’ sponsorship possibilities (within smaller limits for both). On the last trading sessions equities and commodity indices have been trading into different directions, but it is too early to assure if these two assetclasses will start to have inverted correlation again. Coffee gave it is contribution to the delinking process, running higher on Thursday, while many participants were still sleeping. Those who were short calls (options) had nothing to do to cover their exposure early in the morning other then buying futures on a thin market, and at one point the “C” was rallying US$ 16.00 cts/lb. Origins took the opportunity to sell, but not enough to curb the fund buying enthusiasm. By the way, once more the rally started in London, and then took New York along. Technical Focus: London keeps making new highs regardless the overbought condition of technical indicators. Only if the market breaks below 1645 it could start to trigger some sell-stops, but as long as it manages to hold the 1600 area it might just be called a correction of the uptrend. The “C” is consolidating and to kick sell-stops a move and close below 155.40 is needed. RSI and stochastic are overbought but if it trades sideways for sometime it can do the job of alleviating the condition.
Fundamental Focus: One of the references that we had to believe that the market would rally
towards the middle of the 2nd half of 2010, was the high differentials out of Central America and
Colombia. The simple rationale behind it was just a convergence of the board with diffs, therefore
we said on our presentation in Guaruja that a US$ 30cts/lb gain was quite feasible (but timing is
everything). I thought the weight of the Brazilian crop, which is not small, was the sole reason for
the “C” to be capped until there, and then the market would be free to escalate. Although it did not seem to be a consensus, many thought the same, but the surprise element played out, independently of being intentionally provoked as the lovers of Conspiracy Theory say. The reality is telling us that even though the market rallied 35 cts from where it was trading a couple of weeks ago, the differentials did not ease much. For mild coffee the reason is quite simple: they have little to none inventories being carried, and those who were holding back on their selling, certainly are not in a rush now.
On the Brazil side, it is not that difficult to figure out that producers are taking the opportunity to sell as the COT have showed us, but as several players were short differentials and were getting hurt, the basis did not dilated as much as one would think. BM&F/New York arbitrage is trading at US$ -21 cents/lb, or about 6 cents weaker than it was trading on June 9th. Bears are saying that they were able to buy coffee in Brazil at replacement cost of US$ -28 cts/lb, but for those who were paying R$ 300.00 per bag before the rally, a R$ 320.00/bag in fact represents only US$ 11.00 per bag more, comparing to US$ 46.30 /bag that ICE rallied. The constraints now are
how much more the buyers of physical can take, given that besides paying for the coffee they buy, they also have to send margin to the exchange. A sudden move higher like the one we just saw forces treasury departments to follow closer the trader’s position and risk might limit the exposure. If the market does not rest or go lower, it can trigger cash-flow problems. Back to 1997 the reason the market rallied was scarce availability/producing of mild-coffee, the same reason we are seeing today. Although ICE certified coffee is now at 2.3 million bags, and 13 years ago it was only 20K bags, the composition of the certs does not supply the industry of fresh washed coffee, which was the reason the board was being dragged lower. So the market got used in trading high differentials that got unlinked with New York, and now everyone is scratching their heads as the “C” went up but diffs did not. Does it tell you that more gains are needed? What if you sell the market at US$ 170.00 cts and funds buy another 10K to 15K, taking prices to US$ 200.00 or higher? People were looking to buy US$400.00 cents call today, and a couple of trades took place with the US$ 300.00 strike. In 2008 when the market traded at US$ 171.90 cts funds had a 55K lots long position and the OI was at 189,811 lots. Today they probably have a 40K lots net long (all futures only) and the open interest is at 164,101 lots. Weak-hands that are still short are afraid of being forced to cover their position, and as margins keep going higher the market can become even more volatile.
To finalize we should say that the more Brazil sells at current price-levels, the less they will need to sell later on, so differentials will get a lot tighter again.
Those who have coffee, and money, should not let this opportunity pass. At one point the market will have a strong move lower, but it is tough to know if it will first make shorts suffer or not.

The Conclusion
New York trades at the highest level since February 24th 1998. The last leg of the rally took place early in the morning, and caught the people that were short calls, which were forced to buy
futures to cover their exposure as the pit was closed. London once more started the move, and today it closed near the highs, causing fear on those who are short. Origin selling is mostly coming out of Brazil, as other origins do not have much coffee, but exporters and dealers need the market to calm down not to constrain the cashflow.

Differentials have not changed much besides the US$ 35 cts rally, mainly because no CAM or Colombia have coffee enough to sell. If we compare the fund position to the last time the market traded at US$ 170ish, they got long 55K lots of futures and the open interest was at 186K lots. Assuming today they have a 40K lots with an OI of 164K lots, they could buy another 10K to 15K lots as the number of contracts open keep increasing. The more Brazil is selling the market
on the rally, the least it will need to sell down the road, which does not mean that the “C” can not
drop US$ 20 cents of more once funds decide do sell.
The question is: Will the market trade higher first to then collapse, or it has seen the highs for now?
Funds (that are long) are certainly getting the positive variation margin, therefore giving them
more bullets to play right now. Use options to buy price-protection for levels that
you feel might provoke cash-flow constraints.Have a good day and good trades.
Best Regards,
Rodrigo Costa

28/06: Edges Lower; Outside Markets, Consolidates

Arabica coffee futures edged lower as prices consolidated after last week's rally to 12-year highs, with outside pressure coming from a weak commodity sector and a firm dollar.

Nearby July coffee lost 0.70 cent, or 0.42%, to end at $1.6630 on ICE Futures U.S. Most active September lost 0.80 cent, or 0.47%, to settle at $1.6810.

Coffee futures have taken a breather in the last two sessions after vaulting to 12-year highs last week. Traders may be content to hold prices in narrow ranges as they assess the market's new trading parameters. September coffee rallied to a top of $1.7650 last Thursday but closed at $1.6875, as traders took profits off the newly minted 12-year peak and producers sold. Tight supplies of quality arabica beans continue to support the market, but there are signs that the supply situation may be softening.

The market rally has been centered more on chart aspects than on fundamentals, as the global supply balance has been snug for some time, said Hussein Allidina, veteran analyst with Morgan Stanley.

Tight supplies are now beginning to release their grip on the market with the onset of the large Brazilian coffee harvest, he said in a research note.

In addition to supply concerns, coffee futures have shot up dramatically in the last two weeks because of "unfounded" frost concerns in Brazil. The weather scares, combined with a persistent fall in warehouse stocks, caused coffee futures to climb 25% in the last two weeks, said Allidina.

He projects global 2010-2011 arabica coffee output to rise by 14.2 million bags, year-on-year, with ending stocks seen increasing by nearly five million bags to 367.2 million.

ICE coffee's climb brought out increased producer selling above $1.70 a pound, a signal that the market may be forming a top, said Boyd Cruel, senior softs market analyst at Vision Financial Markets in Chicago.

The rally was "way overdone," and with the Brazilian harvest picking up momentum, prices would be expected to fall more in line with the fundamentals, said Cruel.

The high coffee prices and dry conditions have pushed Brazilian farmers to harvest 32% of the expected 41.5 million bags of arabica coffee through June 23, ahead of the average pace, an analyst with Safras & Mercado said Monday. Of the total arabica and robusta crop, Brazilian farmers have harvested 43% of the 54.6 million 60-kilogram bags.

Weather in Brazil is expected to remain dry until July 11-12, when a cold front will bring two days of rain, forecasters said. They see no risk of crop-damaging frost in the main growing regions.

Coffee futures also found outside market pressure on a lower trade in the commodity indexes and a firming U.S. dollar. A stronger dollar is normally bearish for commodities as it makes them more expensive in other currencies.

ICE warehouse stocks fell 12,286 bags to total 2.23 million 60-kilogram bags, the exchange reported.

ICE open interest fell 874 to total 164,101 lots. Volume is pegged at 9,471 lots traded, with 3,945 calls and 4,258 put options traded.

   ICE       Change     Range
July $1.6630   dn  70    $1.6600-$1.6800
Sep  $1.6810   dn  80    $1.6740-$1.7065