The Hightower Report

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Ideas that Vietnam exports for December will be down from last year is not a big concern for the market as the harvest is coming a bit later than normal and exporters will not be too active early in the month. Better supply ahead and increased flow of higher quality coffee from Colombia and neighboring central America countries appears to be the bigger supply concern. The coffee market was able to rebound from early lows yesterday and moved back towards unchanged levels, but the market remains well below last week’s highs. News that Hurricane Thomas caused damage to this season’s Costa Rican coffee crop provided some support for the market, but expectations that this season’s harvest in Vietnam will reach full speed within a few weeks limited the strength of the recovery. Fears of increased flow from Vietnam helped to pressure London futures and a strong rally in the US dollar only adds to the short-term selling pressures. With increasing supply pressures from Vietnam and Central American countries expected in the weeks just ahead, the coffee market may need help from outside forces in order to avoid a further set-back in prices. The Commitments of Traders reports as of November 23rd showed Non-Commercial traders were net long 35,189 contracts, up 505 contracts. Non-Commercial and Nonreportable combined traders held a net long position of 37,064 contracts. Commodity Index traders held a net long position of 49,634 contracts, up 676 contracts for the week. The hefty net long position should not be a significant issue unless support levels are violated and this could spark a long liquidation trend ahead. ICE daily exchange stocks were up 5,430 bags yesterday to 1.744 million with 18,392 bags pending review.

TODAY’S GUIDANCE: The market seems to have a bearish supply fundamental set-up for the next few weeks and traders will be watching the harvests in Colombia and Vietnam closely over the near-term.

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Outside market forces are bullish this morning and this has helped spark strong buying in most commodity markets including coffee. The short-term supply fundamentals appear mostly negative for coffee and the upside may be limited. March coffee turned up to close higher on the session yesterday after first moving down to the lowest level since November 3rd. The reversal and minor gains left the market well below last week’s 13-year highs. The market saw follow-through buying overnight to push March coffee up more than 450 points at times. Tight near-term supplies of Arabica coffee continue to provide support for the market, even as harvests in major Central and South America growing areas move into full swing. A sharp drop in exchange stocks to yet another 10-year low may have added to the positive tone. Rain in Vietnamese growing areas has caused even further delays with this season’s coffee harvest but traders do not see this as a major issue. In fact, the rains that have caused the harvest to be delayed by about 1 month have helped key growing areas recover from dry soil conditions and may be beneficial to next years crop. Too much rain has been an issue for Costa Rica this year and the production forecast was revised down by 3% from previous estimates to 1.56 million bags. Ahead of the hurricane season, traders expected a crop of near 1.66 million bags. ICE certified exchange stocks were down 45,335 bags on the session to 1.736 million bags with 44,678 bags pending review.

TODAY’S GUIDANCE: The sharp drop in exchange stocks plus bullish outside market forces may help support the market in the near-term. The market is still operating under the negative technical influence of the November 10th reversal.

TODAY’S MARKET IDEAS: Selling resistance for March coffee comes in at 209.90 and 212.60 with 197.45 and 188.55 as next downside targets.

Below is a sample of The Hightower Report’s Daily Commentary. To get this comment, and our daily coverage of 15 additional markets and trade ideas, visit futures-research.com for your free 2 week trial!

The coffee market has been unable to recover from a pullback earlier this week and may need some fresh positive news to revive the recent rally. The market has consolidated in the 195.00-205.00 zone for December futures. With prices still relatively close to 13-year highs, however, there may be a danger of an extended move lower if tight supplies in the Northern Hemisphere are relieved over the next few weeks. December coffee was able to grind out a small gain yesterday but had little of the upward momentum shown by other soft markets. Although a weaker Dollar was able to benefit most commodity markets, coffee prices were still unable to lift back towards the upper end of the recent trading range. Recent rains in Vietnamese growing areas have delayed the harvest of this season’s crop and have added to an already tight supply situation in that nation. Weather has also become an issue with the coffee crop in Colombia, with expectations for a large recovery in production already being scaled back. Coffee exports from Guatemala during October were down over 15% from last year’s level, which may be due to transportation delays from recent heavy rains in production areas. The key swing factor for the coffee market may be with the better Brazilian production, where the recent rally in prices has helped to lift the level of export sales from that nation. ICE certified exchange stocks were up 34 bags to 1.817 million with 15,519 bags pending review.

TODAY’S GUIDANCE: Colombia cash premiums are coming and Brazil cash trade seems to be picking up. Without help from outside market forces the market looks a bit vulnerable to either a more significant downside correction or a continued period of consolidation.

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The bullish technical action yesterday in the face of bearish outside market forces shows strong relative strength for coffee, and the upside break-out suggests another run at the highs with 208.90 as the next upside swing target for December coffee. Traders have turned more positive on news of the past several days of a slower than expected recovery for Colombia production and the possibility that 2011 production could be down from 2010. Uncertainty over the 2011 crop out of Brazil and tightening exchange stocks are other supportive forces. December coffee made a recovery from early weakness yesterday and was able to make a new high for the move while finishing the day with sharp gains. Concern that heavy rains in production areas of Vietnam and Colombia could have a negative impact on upcoming crops remains the main supportive factor for the market. Export firms in Vietnam are still waiting for government approval to start a coffee stockpiling plan which would pull coffee off of the market for six months. Coffee exports from Central America, Mexico, Colombia, Peru and the Dominican Republic (group of nine producers) for the 2009/10 season which just ended totaled just 23.27 million bags, down 9.6% from the previous year. ICE daily exchange stocks were down 5,750 bags yesterday to 1.844 million with 27,518 bags pending review. Stocks are near a ten year low.

TODAY’S GUIDANCE: The Brazil crop is in the flowering stage and traders will keep a close eye on the production outlook for the 2011 crop but the short-term focus is on the smaller than expected production out of Colombia. Exchange stocks have declined recently which has added to the positive tone. The close above 188.30 for December coffee suggests a resumption of the uptrend with support at 188.30 and 185.15 with 208.90 as next upside target.

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More favorable weather for Brazil and increased production from Colombia and Vietnam this season are forces which should help keep the trend down but positive outside market forces plus a sharp decline in exchange stocks are factors which might help offset these forces temporarily. December coffee could not extend Tuesday’s rebound, and finished the session with a moderate loss yesterday. At this point, prices have fallen over 10 cents during the past week and are over 20 cents below last month’s highs. The coffee market is still waiting for details of a potential stockpiling plan in Vietnam, which could involve up to 500,000 tonnes for up to 6 months. Heavy rains in production areas of Colombia may have a negative impact on the upcoming harvest but traders see a significant jump in production. Production in September was thought to be near 600,000 bags, up 28% from last year. Given the flowerings from earlier this year, traders see production in October above 1 million bags with about 1.5 million for the month of November. This is likely to ease the tight situation for higher quality coffee. Traders also see Vietnam production up by near 3-4% this year. Indonesia production of robusta coffee from Sumatra was down 10% in September from last year as too much rain damaged crops. ICE daily exchange stocks were down 24,674 bags yesterday to 1.921 million with 4,778 bags pending review.

TODAY’S GUIDANCE: Without a major production issue from key producers, the increased supply of coffee on the world market and more importantly the jump in higher quality coffee should help the market continue to pull back from last month’s 13-year highs. Outside market forces are positive and this could be a short-term offset but the trend looks to remain down. Selling resistance for December coffee comes in at 178.95 with 165.95 as next key support level.

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Diminished weather concerns for crops in Vietnam and Brazil for the coming year, along with ideas that the Colombia production will continue to improve in the months just ahead, may be a negative set-up for the coffee market. Supply fundamentals look somewhat bearish ahead and speculators still hold a hefty net long position in the coffee market. The COT reports as of September 21st showed Non-Commercial traders were net long 40,892 contracts, a decrease of 2,945 contracts for the week. Trend-following fund traders were in a long liquidation mode over the previous week but still held a net long position of 30,882. The selling trend of the fund traders is considered a bearish short-term force. December coffee was able to grind out a moderate gain for the session yesterday as it found strength from the weaker Dollar, but was unable to move away from the trading range of late last week. A tropical storm that hit several coffee production areas in Central America provided the main fundamental support for the market. Honduras traders do not see much in the way of damage from heavy rains of the past week. News that coffee exports from Vietnam during the 2009/10 season rose by over 5% over last season kept some pressure on prices during the session. Traders see the 2010/11 harvest in Vietnam up about 5% from last year and this may be seen as a negative force in the months ahead with much of the crop harvested in the November to January time frame. Vietnam is offering new crop coffee on the world market now. Rains this week in Brazil could spark widespread flowering for the 2011 crop and this could ease concerns about potential tightness next year. ICE daily exchange stocks were down 10,194 bags yesterday to 1.969 million with 10,742 bags pending review.

TODAY’S GUIDANCE: Improving weather in Brazil may weigh on the market over the near-term and could spark increased long liquidation selling from speculators. Without help from outside market forces, the market looks vulnerable to increased selling pressures from funds. Resistance for December coffee comes in at 186.05 with 173.70 and 165.95 as next key support levels.

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In spite of the weak close yesterday, news that China will keep a loose monetary policy and a weaker US dollar was seen as a force to support a surge higher in gold and commodity markets in general overnight. Traders see the market as tight upfront but more and more analysts are warning of the impact of a world production surplus for the 2010/11 season. A sharp drop in exchange stocks to under 2 million bags for the first time in nearly 11 years along with the continued dry and warm trend for the Brazil coffee growing regions are factors which may provide underlying support. There are a few light showers in the southern Brazil growing areas but not enough to ease the general dry conditions for the 2011 crop. December coffee could not sustain an early drive to new highs for the move yesterday as the market reversed itself with a late sharp sell-off and ended the day with sizable losses. There was little near-term change from the supply/demand side of the market, but prospects for large production increases from upcoming harvest in South and Central America have been projected for quite some time. US Green coffee stocks fell almost 169,000 bags during August. The rally has caused Brazil producer selling to remain fairly steady and traders see a bit more activity from buyers in Europe, especially for higher quality coffee. Although rejecting a test of the recent highs, December coffee is still over 13 cents higher for the month of September. ICE daily exchange stocks were down 22,121 bags yesterday to 1.985 million with 8,762 bags pending review.

TODAY’S GUIDANCE: Brazil growing regions are too dry and “if” the weather turns to a wetter outlook, the concerns for the 2011 crop will ease and the market would then turn to a focus on a bigger supply for the 2010/11 season. However, if there are concerns for a significant decline in the 2011 Brazil crop, the trend is likely to remain up for now. There is short-term support for December coffee at 192.70 and 191.40 with 203.10 as next upside objective.

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The market continues to focus on the near-term instead of the long-term, as current tight supplies have been able to overcome the prospects for large coffee crops later on during the year. What may be the most surprising part of the recent strength in coffee prices is that it was achieved without any hint whatsoever of Brazilian frost damage, which traditionally has been the catalyst for coffee prices to reach these sorts of levels. December coffee made a sizable extension to this week’s rally during yesterday’s session, and just missed posting its highest closing price for a nearby contract in nearly 13 years. Tight near-term supplies of Arabica coffee continue to underpin the recent recovery, with upcoming harvests in South America having yet to make a supply impact on the market. There was also noticeable carryover support from the continued rebound in global equity markets, which in turn has improved the sentiment for many of the commodity markets and has kept large funds leaning heavily towards a buy-and-hold strategy. With yesterday’s strong close, the December coffee contract has now fully recovered the 18 cents worth of losses made during the massive three-day sell-off last week. Officials from Honduras forecast that nation’s coffee crop for the 2010/11 season to be over 6% higher than last year, with exports to increase by nearly 7%. ICE exchange stocks were up 402 bags yesterday to 2.014 million with 6,965 bags pending review.

TODAY’S GUIDANCE: In spite of the recent strength in coffee, there continues to be little in the longer-term fundamental outlook to support prices for a further drive towards new highs. Resistance for December coffee comes in at 186.75 and the market needs to hold on a move above the 188.65 high to negate the reversal from last week. A close under 177.00 and especially 174.25 could turn sentiment for this market to bearish, with 160.95 as downside target.