From the December 01, 2010 issue of Futures Magazine • Subscribe!

Coffee buzzed

While coffee began the year in a fairly consolidated trading range, it has exploded in the second half moving from $1.34 per pound on June 9 to $2.17 a pound on Nov. 9, a more than 62% increase in five months. Reasons for the move rest mostly with South American growers.

Spenser Patton, chief investment officer at Steel Vine Investments, attributes the move to weather problems in Columbia severely damaging high quality Arabica beans. Additionally, Brazil, despite a record crop, is having a hard time getting the beans out of the country. “This supply shortage is being caused by logistical issues,” Patton says. “There have been long delays for coffee coming out of Brazil because sugar has had such a run-up and the ports have been blocked with hundreds of ships waiting to get out with sugar. Coffee has not been making it onto the ships.”

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Patton expects prices to drift down as supplies make it to market, but warns, “The wild card is quantitative easing and this appetite for commodities in general. Fund buying has largely been thought to be keeping this market higher.” He expects to see the March contract from $1.80-$2.10 through yearend.

Shawn Hackett, president of Hackett Financial Advisors, also says Brazil is the reason for the recent move up, but for different reasons. “It’s been an ongoing supply and demand imbalance over the decade that has continued to get worse. In the last year, the large above-ground buffer stocks Brazil had on hand ran out,” he says.

Hackett is much more bullish on coffee because he says we are facing a massive supply shortage caused by increased demand. “Coffee is not economically sensitive. Even through the entire economic crash, coffee demand was up for that entire period,” Hackett says. He is watching for a long-term move up to the $4.00 range and through yearend is looking at a worst case downside of $1.80 but looks for $2.40 by yearend.

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