The Pied Piper of Coffee

Back in October 2020, the Pied Piper of the Brazil drought led away all of the bearish Rats from the #CoffeeMarket, and now he has returned to collect payment. Either the market has to deliver some bullish data from the current crop or all of our new-found bullish speculator friends are going to disappear with the Piper.

For months we have been hearing about the drought in Brazil causing a massive shortage of coffee and indeed the market has rallied from 105c back in November of last year to 165c just last month. This was during a period of reduced consumption from Covid and a massive surplus from a record Brazilian crop!

This means that the Bullishness of Nov through Jun, was front-loaded based on the fundamentals of July through Dec. Its July 13th today and the time is fast approaching to pay the Piper one way or the other.

The #bullishness of the #fundamentals was complicated by an entirely different story from the #Macro environment. A weak #dollar spurred by #Inflation and loose #monetarypolicy had rallied many #commodities through Jun 2021, #coffee included.

However, with #inflation in the headlines, the stock market at record highs and an extremely tight US labor market, the #FederalReserve can't justify QE ad infinitum any longer. They have begun to telegraph raising rates, and they have signaled it will likely be sooner than originally anticipated.

The market has taken notice of this trend and the USD has rallied significantly since the June meeting of the #FOMC. #Commodities have commensurately taken a dive as a result. Coffee has actually held its value better than many of these.

The reason why, is, ostensibly because of the bullish fundamentals. While other commodities have cooled off, Coffee has stayed hot and its bullish specs have stuck around.

However, those bullish specs are fair-weather friends. They will stick around as long as coffee is making them money. If the 21/22 deficit is not as bad as expected and Brazil surprises with more coffee than anticipated those specs could turn around and follow the Piper right back out of the market.

How bad is the #deficit? The clarity is not there yet, but rumor is that there are hefty #stocks of coffee in Brazil. This could still be a bull market for the ages, all of the Piper's promises may very well come true, but we are fast approaching the time when seeing is believing.