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*The Morning After-a Coffee Market Post-Mortem*

I'm not a big fan of retrospectives, in general I would rather be forward looking then commenting on the past, but yesterday's price action was unique so I wanted to try and dissect it.

630am EST - Market was up 3c and change, thought this was peculiar and checked the weather reports: no frost, but coldness in Brazil and frost risk approaching the coffee areas. BRL was steady. Emailed my slightly bullish scorecard to my subscribers with a note saying that I didn't see any frost risk. I'm slightly annoyed that my view is bullish because my gut says mkt will correct the overly exuberant early morning buying.

Reached out to my London friends about why Mkt was up so early and we concluded it was macro view based on inflation comments by Yellen.

830am EST - BRL rapidly firms, but coffee shrugs it off and even corrects a bit. I go on my morning calls.

1030am - I notice that the other side of my morning call who's usually friendly and eager to talk seems distracted and eager to get off the phone. I end the call early and look at the market, up 10c, Implied Vol up 5%. Holy Moly.

The next few hours I spend calling and texting with brokers, producers, traders, etc. Everyone asking what is going on? The market closes on the highs, just below the resistance at 150.

What struck me as unique was the apparent lack of a clear catalyst. Usually when there is a move of this magnitude a consensus builds up pretty quickly as to the cause: a crop number released, a weather report, a macro move...but nothing seemed proportional to the price movement.

The day after we have a little bit more perspective.

For one thing the OI ruled as unlikely the idea that this was somehow short covering (OI increased by 5k). Furthermore, there seems to be more chatter in the macro-trading world about inflation and macro commodity bullishness. This combined with the lack of consensus among the trade leads me to suspect that it may have been a "tourist" with a lot of money placing a macro bet on coffee and trying to trigger trend followers.

Could also have been a trade house but seems a bit heavy handed for most of the coffee trade houses.

What about the fundamentals? There is of course the Brazil story, but to say that is old news would be an understatement. There is a strike in Colombia that threatens to derail shipments of coffee from there, but again that started a week+ ago and don't think there was any new information.

Macro and Currency are definitely a factor. Lumber, wheat, soybean, corn all rallying on fundamentals and inflation. Brazil announced yesterday that they would be raising their Federal Funds rate to 3.5%, which was on the high side of what was expected, but added that they were raise another 75bps in June meeting.

Since the rate hike was expected, could be that traders were front running the announcement.

Looking forward what is most concerning to me now is the Commercial position. The trade is quite short, the roaster is not long enough. With decreasing credit over the last few years, margin calls will likely sting more and we will likely need to see call buying and or lifting of hedges to protect. Roasters may need to add additional protection.

Those of us that believe there will be a significant deficit this year believe the market will move higher. Volatility appears to be returning, and the window of opportunity to add protection may be diminishing.

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