Softs Update: A Bullish Jolt For Coffee Investors!
After suffering a brutal 2½-year downtrend, the price of coffee is suddenly reversing higher. In fact, the luscious bean is currently trading at a 2-month high near $1.15 a pound.
And even more importantly, the commodity is breaking through an important technical resistance area.
Take a look…
As you can see, coffee is breaking above a long-standing technical downtrend line (blue-line). And now that the commodity is above this important level, the odds of further price gains increase.
But wait a second…
Before you log into your brokerage account and buy the iPath DJ-AIG Coffee (JO) hand over fist, let’s look at the fundamental reason behind this rally.
Vietnam, one of the world’s largest producers of Robusta beans, recently announced it is holding back coffee exports.
What’s the reasoning?
The price of coffee is getting absurdly low. As a matter of fact, the commodity hasn’t traded at the $1.05 level since early 2009. As a result, growers around the globe are feeling the pinch. By holding back coffee shipments, Vietnam hopes to create an artificial supply shortage.
And it looks to be working… for now.
The International Coffee Organization recently reported stocks certified for delivery against London futures recently fell to 765,000 tons- a historically low near-term supply.
So, with this information in mind, should you buy JO?
After all, the ETF is one of the best ways to get long the coffee market without the need for complicated and risky futures contracts.
Quite simply… No.
You see, there simply isn’t enough storage capacity in Vietnam to hold the commodity off the market for very long. And with Vietnam producing yet another record coffee harvest as we speak, exports will have to resume at some point in the not so distant future.
And when they do, watch out- the price of coffee will fall once again.
So while it’s tempting to buy into the coffee market at these depressed long-term levels, the recent bump in prices is likely just a short-term head fake.
Until Next Time,
Justin Bennett
Category: Coffee
