DJ ICE Coffee Review: Slight Losses In Lightly Traded Session

Arabica coffee futures closed modestly lower Wednesday, after a choppy session in which prices were pressured by light speculative selling but buoyed in part by a weak U.S. dollar, gains in commodities and razor tight physical supplies.

Most active May coffee lost 20 points, or 0.15%, to settle at $1.3210 a pound–near the session peak of $1.3270 a pound. On a day when the U.S. dollar index was weak and the key crude oil and gold markets were higher, coffee failed to generate much bullish enthusiasm, evidenced by the low trading volume.

« I’m kind of surprised coffee didn’t show more strength here amid so many other supporting factors, » said Spencer Patton, analyst and chief financial officer at Steel Vine Investments in Chicago. He added that a « tremendously strong crop is expected from Brazil…and as long as that’s hanging over the market these rallies are meant to be sold. »

Bullish traders may attempt to push May coffee up to $1.3600 or $1.3700, but since the market is not yet oversold from a technical perspective, those rally attempts will likely be met with fierce selling, said Patton. Coffee continues to find support, however, from worries over extremely tight physical supplies in Central and South America.

« I expect to see a parabolic move higher at any moment as coffee supplies have reached the tightest levels in recorded history, » said Shawn Hackett, analyst and editor of The Hackett Money Flow Report. After three years of supply pressure owing to adverse weather and aging trees, world coffee stocks in producing countries are nearly exhausted.

Global coffee production in the current 2009-10 crop cycle is forecast to reach 123.6 million 60-kilogram bags against demand set at 134 million bags, according to International Coffee Organization data. Brazilian production for the upcoming 2010-11 crop may not be as strong as some analysts believe, according to participants at the World Coffee Conference in Guatemala City.

Brazilian cooperative Cooxupe estimates the crop at 48 million to 50 million 60-kilogram bags, versus expectations from the industry and trade of a record 60 million bags or more. The crop suffered from an unusually wet growing season and a lack of sunshine.

Cooxupe is the world’s largest coffee cooperative and handles more coffee annually than the combined production of the Central American countries of El Salvador, Nicaragua and Costa Rica. « This market remains a powderkeg, » said Hackett, adding that buying futures in the low $1.30 area is an « ideal entry point for investment. »

Source : FutureSource