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M.R. Subramani

Signs of weakness for short, medium and long term

Chennai , June 11

Global coffee prices are headed for a decline with all technical parameters showing sell signal. This is despite fundaments showing a tight supply situation, including the fact that Brazil has been having the lowest-ever carryover stocks.

The negative signals are for short, medium and long term, with a firm indication of a bear grip in the medium term.

The domestic coffee sector is of the view that coffee prices could stabilise a little after the current decline. This is based on the fundamental view that last year's crop had been low, coupled with smaller carryover stock, better export and domestic demand.

Strengths

For coffee, the strength, particularly in the domestic sector, could come from a host of things. First, any decline in the production for 2006-07 crop year (October-September) could fire up the prices. The output for 2005-06 has been pruned to 2.82 lakh tonnes from initial estimates of 2.94 lakh tonnes. It still is higher than last year's production of 2.75 lakh tonnes.

For the next season, arabica production is seen lower, while robusta could turn out to be better. The arabica crop continues to suffer from incidence of white stem borer and it is seen affecting the plant this season also.

Robusta, on the other hand, seems to be free of any such problem. Good showers also seem to have helped the crop but the jury is still out on how the crop could be next season.

Any adverse weather condition in Brazil and Vietnam could also prove to be a boon for prices to go up.

Weakness

Weakness for coffee is definitely in the form of higher production globally. Good weather and fall in consumption are other dangers, while funds' failure to evince interest could also peg the prices lower.

This year, the Brazil crop is pegged at 43.5 million bags (of 60-kg), higher than earlier estimates of around 41 million bags and higher than initial estimate of 44 million bags.

It is also up 24 per cent over last year. Higher yield in Vietnam will result in its crop being 13.85 million bags (12.3 million bags last year), while Columbia is likely to produce over 11 million bags.

As a result, coffee production during 2006-07 could be 123.6 million bags, a rise of 10 per cent over last season.

Weakness also emerges from the approaching summer in Europe and other western nations. It is a time where coffee consumption drops and as a result, roasters' decision to go on a hand-to-mouth existence could be vindicated.

Opportunities

Opportunities for investment in coffee currently exist in only going short. However, any signs of frost affecting the Brazil crop or any sudden interest from funds could signal an uptrend for coffee.

Still, opportunity could be round the corner if the roasters are unable to sustain the hand-to-mouth trend. The current extension of cold climate in Europe could also come handy for prices to rise, though it looks a bit remote. Drop in stocks could also come in as an opportunity.

Threats

Threat for coffee is currently in the form of funds going short. Some of the funds have gone short in a limited manner but there is all likelihood of their going short in a big way once Western summer sets in.

Any further rise in global coffee production or signal of drop in consumption. Limited interest in India for coffee futures is also seen as a threat.

Technicals

On Friday, coffee futures on New York Board of Trade closed at 8-month low of 95.90 cents for July delivery. Speculative selling was seen as the primary reason for the fall.

The other sign of weakness is that the number of speculators who bet on prices falling doubled last week, as per Commodities Futures Trade Commission (CFTC) data. Non-commercial net short positions were up 114 per cent during the May 30-June 6 period to 6.147 lots.

Going by the technical charts and weekend's close, July arabica could find support at 94.30 cents and resistance at 98.70 cents with 96.50 cents as pivot points.

More Stories on : Coffee | Commodity Markets

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