Coffee Falls to 2009-Low on South American Output; Cocoa Drops
Comment of the Day

October 28 2013

Commentary by Eoin Treacy

Coffee Falls to 2009-Low on South American Output; Cocoa Drops

This article by Isis Almeida for Bloomberg may be of interest to subscribers. Here is a section
Weather conditions remain ideal for trees in Brazil, and production may reach 55 million to 60 million bags next year, Rio de Janeiro-based broker Flavour Coffee said in a report on Oct. 24. Output this year is estimated at 53.7 million bags by the U.S. Department of Agriculture. Farmers in Colombia will reap 10.6 million to 10.8 million bags, exceeding a target of 10 million bags, the Colombian Coffee Growers Federation said. Each bag weighs 60 kilograms (132 pounds).

“Flowering for the new season Brazilian crop bodes very well for next year’s crop and Colombia’s coffee crop is progressing extremely well,” Kona Haque, a London-based analyst at Macquarie Group Ltd., said in a report e-mailed today. “The next target could well be $1 a pound by the year-end.”

Eoin Treacy's view In a bull market, the two-year growing cycle for coffee trees can inhibit the ability of farmers to increase supply. It also ensures that as new trees mature, increased supply can have a lengthy negative effect on prices. If we look at a long-term chart of Arabic coffee, occasional spikes higher have been following by equally abrupt declines over the last 40 years.

Since hitting a peak near 300¢ in 2011, Arabica coffee continues to hold a progression of lower rally highs and is trading at a contango throughout the futures’ curve. While prices are now approaching the psychological 100¢, which is a potential area of support, a clear upward dynamic would be required to question supply dominance and to check momentum.

Companies such as Nestle are among the beneficiaries of lower commodity prices as they enjoy margin expansion. The share has been ranging in the region of the 200-day MA since July and broke out of its short-term range last week. A sustained move below CHF60 would be required to question medium-term upside potential.

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