From the October 01, 2011 issue of Futures Magazine • Subscribe!

Coffee taking a break

Hot Commodities

Although coffee had a huge rally in August, it quickly came off those highs giving back half of the move in September. What’s more interesting, some analysts are finding it hard to explain coffee’s rise in the first place.

“Coffee prices hit prices that just didn’t make sense because we’re in the middle of harvest season where there are lots of bags hitting the market every day. It didn’t make sense as to why we saw coffee climbing like it was,” says Spencer Patton, chief investment officer at Steel Vine Investments. He goes on to say that this was the fourth largest harvest on record and it came during an off-year. Based on that, he says coffee should be trading closer to $2 per pound. Looking forward, Patton says coffee will benefit or gain along with other commodities as the situation in Europe becomes clearer with no other fundamentals really affecting it. He sees December coffee support at $2.50 and $2.20, and resistance is at $2.90 and $3.00.

Shawn Hackett, president of Hackett Financial Advisors, says old crop coffee still is taking its toll on prices. “Basically, it’s the tale of two different markets. The old crop fundamentals remain and will continue to be very bullish. The current crop is not going to be as large in Brazil as many initially called for. That’s what really stimulated the big decline. We’re back to having a very tight, deficit crop situation,” he says. Hackett says traders should focus on flowering and blooming of the coffee trees in Brazil over the next couple months because that will give an indication of next year’s crop. Hackett sees December coffee support at $2.40, the level he says Brazil stops selling at; with $2.80, the level at which Brazil floods the market.

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