The Struggle for $2 Coffee, Comparison with 2014

4 days in a row now #CoffeeMarket has tried and failed to break the psychologically significant 200 level. Back in 2014 #coffeefutures crossed $2 dozens of times before finally collapsing and ushering in a 1 year bear market which despite a reprieve in 2016 then continued into 2019. As a twitter friend said "No two patterns are alike, but they're unfolding very similar[ly]."

Let's be real: with the worst #frost in a generation, a #drought, and dry forecast for next 4 weeks, this bull market is not unwarranted, but at the moment we are struggling to maintain momentum.

What worries me now, is the same thing that worries me after the frost, a failure to live up to the hype. Let me elaborate:

In my interview with Commodity Weather Group meteorologist David Streit he mentioned something interesting, he said (paraphrased) "the window for precipitation for the Arabica crop is narrowing". What he meant by this was that the wet season is getting shorter, he mentioned the last 15 years specifically but it may be a longer period even then that.

While on the surface this may seem bullish for coffee prices (bad for the Brazil crop), it actually makes me a bit cautious for this rally.

Here's why:

I've been telling my clients for several months now about the dryness issue in #Brazil (and I've heard a few other analysts do the same). However, it's only recently that these concerns seem to be taken seriously. Moreover, I've now been seeing dryness concerns in the mainstream media, which are usually the last people to report on an issue and leads me to believe that the concern might have peaked.

The forecast is showing drier than normal for the next 5 weeks, which is bad in itself, but it also jives with what David said about the window being shorter. The long term forecasts are a bit more inconsistent, but seem to be trending wetter from Oct forward. So it does seem that we may get a late start to the wet season, but what if its just a late start? If we get decent rains from October forward the plants could make a strong recovery.

One of my favorite heuristics is that Brazil usually surprises with more coffee rather than less.

This is not to say that the situation is not serious, or that we are overpriced at $2.00. There are reports of fires, crops being plowed over and extra skeletal pruning. However, the question is, do we need to be higher than $2?

With a bad frost, dry weather, a late start to the dry season and freight problems, could be that we do need to reprice higher, especially if things worsen. However, the problem is that we are already pricing in a lot of crop problems at $2.00. To get higher than $2, things need to be recognized as an order of magnitude worse then they are. That is possible. The 2010 rally saw a slow burn higher to $3.

But let's play this out in our minds: If the dryness persists for 2 more weeks but then the forecast starts to improve and point to a wet Oct - Dec should coffee continue rallying?

Back in 2014, we had a serious drought and a lot of serious analysts were calling for $3 coffee. However, it never materialized. Instead the market batted around between 180 and 225 for a year and then collapsed. The #BRL and the #currency markets had a lot to do with both the rallying and the collapsing as well.

Today the #currency outlook is not super clear either. Inflation could be a big boost for #commodities if it persists. However, the official #FederalReserve view is that #inflation is "transitory". If the Fed is correct and they raise interest rates then the dollar should strengthen. It might be delayed, but ultimately that is the logical assumption.

If the #dollar strengthens that should put downward pressure on commodities.

To reiterate, the #bullish risks are there. I am not blind to them, and if you go back through my posts you will see many where I talk about being bullish. However, at current levels, I also have to be worried about the downside risk.

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