Coffee Lures Smart Money With First Major Rebound In...A While

Wake up and smell the coffee … it could make you some money.

U.S. coffee futures are on the cusp of a technical breakout above six-week highs—hit earlier this month—that could propel them to three-month peaks. While Tuesday’s session was lower, the market just came off a five-week winning streak.

Coffee isn’t always like this. In fact, it hasn’t been like this for a while.

The last time New York-traded arabica futures enjoyed a good rally was in 2016, when they rose 11 percent. The following year, the market dropped 8 percent. Last year, it lost 2 percent.

Arabica’s Bottom May Be In

Arabica 300-Min Chart

Now, for the first time since October, arabica appears headed for a monthly gain. Though January’s advance thus far is modest at just over 1 percent, it indicates the bottom may be in for arabica, after combined losses of nearly 10 percent in November and December.

Mike Seery of Seery Futures in Plainfield, Illinois, urges investors to watch for signs of arabica approaching the January 9 high of $1.0685 per lb, which could catapult it toward the November 9 peak of $1.1640. Investing.com has a “Buy” on its daily technical call on arabica. Said Seery:

“In my opinion, coffee prices are at a critical juncture, and if we can crack the $1.0685 level, I think prices could move up to the $1.15 area. That would tell me that a longer-term bottom would have taken place.”

The analyst noted that arabica futures were trading just above their 20 Day-Moving-Average of $1.03 and slightly below the 100-DMA of $1.06, which was also serving as a major resistance due to developing weather conditions in top growing country Brazil, which remained a concern for investors.

Reduced 2019 Brazilian Harvest

Seery added:

“The fundamental picture has changed slightly as estimates of a reduced 2019 Brazilian crop, coupled with the fact of lower inventories, have helped support prices over the last couple of weeks. I still think if a weather problem occurs, volatility will expand tremendously to the upside.”

Shawn Hackett, who runs agricultural markets consultancy Hackett Financial Advisors in Boca Raton, Florida, agreed, saying:

“Our work suggests that dry weather will return to Brazil for the first half of February, offering additional stress at a very critical time in coffee cherry development.”

Supportive Weather, Capital Flows

Hackett said capital flows have been very strong and indicative of a market likely to bottom in January and rally into February. He added:

"Given how markets normally precede weather changes…that would argue for a low to form by the month’s end.”

Hackett said many have been pontificating on a Brazilian crop of between 56 million and 58 million bags, but such numbers may not be possible as the dry weather—which had already occurred and was likely to return in February—will be shaving yield expectations.

'Zero Chance' Of A High Robusta Crop

He also gave “zero chance” to estimates that Brazil might produce 20 million bags of robusta coffee, arabica’s alternative, which is also grown largely in Vietnam and traded in London's futures market. Vietnam’s robusta crop has been downgraded by most analysts this year due to disappointing harvest results.

Hackett said drought-stricken robusta areas in Brazil’s key Espirito Santo state could not be irrigated into producing coffee the way natural rainfall spurs the crop.

In conclusion, he added:

“Suffice to say, we are likely trading the largest possible Brazilian and global supplies right now that we are going to trade for the first half of 2019.”

“As such, coffee will likely need to be repriced higher to support that fact.”