02-26-2019: July Coffee: Government and Cooperative Action Needed to Support Prices

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Introduction
Intermarket
Parabolic

Nirvana
News
Point & Figure
Cyclic/Seasonal

Internal Progrm
Third System
Margin

Historic Range
Commitment
Volatility

Random Chart
Options
Calendar Spread

Level Table
Other Factors
Recommendation

3     4

5     1

01     2

6


Introduction

For the past six months analysts have been posting predictions on websites suggesting coffee is about to break out on a major move to the upside. It is way oversold. They point out that at current low prices, farmers are losing money, switching to other crops, calling for government subsidies, and in general the supply of coffee will drop in the face of increasing demand. So far this hasn't happened because it takes a long time for farmers, governments, and cooperates to move to restrain supply. It's a pretty safe prediction that eventually it will happen, but meanwhile warehouses are overstocked with inventory to be burned off, and the time lag waiting for recovery may be considerable.


Intermarket Analysis

We fed Coffee, Cocoa, and Sugar into a neural network to get the following result:




Parabolic Chart

July Coffee:

Parabolic Chart


Nirvana Chart

July Coffee:

Initial Chart


News Analysis

The Brazilian currency has lost more than 1% against the U.S. Dollar and reached a one-week low putting pressure on coffee prices as it gives Brazilian producers more incentive to market their remaining new crop supply to foreign customers. Due to shipping container shortages and a record high crop last year, recvent Brazilian monthly export totals have been much larger than usual, which idicates that Brazil has larger coffee supplies that they normally would have at this time of year. Vietnamese producers are holding off on marketing their new crop coffee until prices turn higher. While this keeps coffee off the market near-term, that supply will eventually be marketed at the same time the Brazilian coffee is being exported in front of their harvest at mid-year. ICE exchange stocks remain in close proximity to their multi-year high from late January.

The fact that the coffee market is very oversold would support reversal action if it occurs.

Four cooperatives in Peru, Honduras, Columbia and Mexico found the best case scenario for a Latin American farmer is receipt of 87% of export value. That is not enough to cover the costs of farm equipoment, land, and water improvements, fees to market and sell the coffee and to service debt. But that means farmers are dropping coffee for other crops. This could be the setup for a perfect storm for a price recovery.

Brazilian and Columbian coffee ministers have stressed the importance of taking control of coffee stocks. All this is while world coffee consumption has grown at an average annual rate of 2%, increasing from 90 million 60-kilogram bags in 1990/91 to an estimate 162 million bags in 2017/18. Globally, coffee is valued at $300 billion.

Columbian coffee is the third-largest export by revenue there, where 556,000 smallholders grow coffee. The government there is preparing a bill to subsidize prices to assure farmers of many of the country's main crops and livestock have a livable income. Appeals go out to big retailers like Starbucks and 7-Eleven to commit to buying 100% of ethically sourced coffee, causing consumers in wealthy countries to support farmers in les wealthy places. There are four main paths to reversing the destruction wreaked by unstainable pricing:
1. Retain stocks within producing countries.
2. Finance the building of internal infrastructure such as sorting and roasting facilities.
3. Eliminate traders by selling directly to retailers. 4. Provide media campaigns to show how low prices now could lead to fewer farmers growing coffee, a drop in production, and eventual much higher prices.

A group of nine commodities analysts and traders recently polled by Reuters believe that the price of arabica beans will rise by nearly 25% above current levels by the end of this year. Over the years, the price for arabica has swung around considerably. Starbucks hedges its coffee purcahses totalling nearly $1.2 billion by the end of 2018, and Starbucks said they were "expected to provide an adequate supply of green (unroasted) coffee through fiscal 2019."

A lull in Brazilian coffee production is anticipated where the 2019-2020 crop is projected to be 55 million bags, a decline of about 8.3% from the record 2018-19 crop which helped push arabica prices to a nearly 13-year low of 92 cents per ound of September 18th. The overall outlook is similar for robusta beans. These are primarily used for instant coffee or added to blends as a cheaper ingredient. Robusta prices are anticipated to rise by 16% by the end of 2019 according to the same Reuters poll cited earlier.

Demand for coffee is expanding more and more into emerging markets. '

Coffee previously did drop below 93 cents per pound in the cash markets around the end of last September, which was the lowest price since 2006 and the first time it traded below $1 per pound in a dozen years. A key reversal at that point suggested an ominous bullish sign. The suggestion is that the low prices last September were unsustainable.

Good February rains in Brazil with more rains forecast contribute to the perception that Brazil will have a smaller but overall good crop. The new crop is forecast to be 10 million bags lower than last year's bumper crop, for arabica, but 2 millioin bags higher for robusta. There will be significant carryover of arabica stocks into the new crop harvest. Overall projections are for a 12 million bag dip in global supplies between October 2019 and September 2020, while consumption will increase by approximately 2.5 million bags in the same period. There is a possible shortfall of 6 to 7 million bags for the coming coffee year which would be countered by significant volumes of carryover stocks, being unlikely to impact coffee supply in the coming year. Speculative and fund sectors are significantly short sold and are depressing coffee prices, but their short covering buying activity according to some "shall" result in a significant rally within coffee markets. A much more positive trading range is forecast for the last quarter of this year following the northern hemisphere summer holiday season.

Australian Government forecasters see a 50% chance for an El Nino condition developing in the Pacific region producing medium term threatening weather conditions for Pacific Rim coffee producing countries.

Our assessment of overall news is that price recovery for coffee is coming in late 2019 or 2020, but governments, cooperatives, and planners cannot respond fast enough to effect much further change in coffee prices for the first part of the year. Coffee needs to climb out of a down cycle, and the question mainly is one of "when", not "if", and the "when" appears to us to be coming too late to affect the front contracts much more than has already been seen.


Point & Figure Chart


241.0|                                                                  T  2/20
     | CSCE- Jul-19 Coffee "C", 37500 lbs, c/lb.   Cm.=0.08  Lim.= 0.8
     |
     |
     |                    X
221.0|____________________XO___________________________________________________
     |                    XO
     |                    XO
     |                    XO
     |X                 X XO
201.0|XOX_____________X_XOXO___________________________________________________
     | OXO            XOXOXOX
     | OXOX           XOXO OXO
     | O OXOX         XOX  OXO
     |   OXOXO        XOX  OXO
181.0|___O_OXOX_____X_XO___OXO_________________________________________________
     |     OXOXO  X XOX    OXO
     |     OXOXO  XOXOX    O OX
     |     O OXO  XOXOX      OXOX
     |       OXOX XOXOX      OXOXO
161.0|_______O_OXOXOXO_______OXOXO_____________________________________________
     |         OXOXO         OXO O
     |         O OX          OX  O
     |           O           OX  O
     |                       O   O
141.0|___________________________O_____________________________________________
     |                           O
     |                           OX
     |                           OXO
     |                           OXO
121.0|___________________________OXO___________________________________________
     |                           OXO
     |                           OXO
     |                           OXO
     |                           O O
101.0|----|----|----|----|----|----|----|----|----|----|----|----|----|----|---
              111        111      11
      455566880011244567900112789901
      201201120221002102002100011201
      218149015001441962164097565932
The above chart is giving a conventional sell signal.


Cyclical and Seasonal Factors

We are headed toward a cyclical high and a seasonal down period.

Cyclicals Cyclicals Seasonals
Seasonals


Internal Program

Our best-performing internal program is "Pattern". It is giving a provisional sell signal.

Internal Printout 1 Internal Printout 2

Results of "Pattern" for Coffee (blue lines = successful trades, red, unsuccessful): (Always in the market.)

Results


Third System Confirmation

Our third system has triggered a sell signal. (Note, disregard the year on the chart. Our regular readers know this is not a Y2K-compliant system, but it still works.)

Third System


Margin

The point value is $375. Initial margin on a single contract is $2,970. Use of options is advised.


Historic Range

Scale trade buyers are entering the market for the long term in this price range.

Historical Chart


Commitment of Traders

Commitment 1

In the chart below, the yellow line is the futures price, read on the right axis. All other colors are read on the left axis. Blue is small speculators. Red is large speculators. Green is commercials. Large speculators with the best track record are getting increasingly-long.

Commitment 2

Interpretation of a Different Site Below (Their trader categories vary from ours):

Commitment 3


Volatility / Probable Range

FB 1 FB 2

The average volatility shown below suggests that a change in major trend to up is imminent near a volatility low point.

Range/Volatilitiy Chart


Possible Future Prices

Random Chart


Option Recommendation

Our option trade recommendation is to Buy (1) Coffee September 95 Call and Sell (1) Coffee September 100 Call @.0. 292 to the buy side or better.


o 1 o 2 o 5

May charts rather than September shown below (not much action otherwise.)


o 3


o 4


Calendar Spread

What the Jul. - Dec. calendar spread suggests to us is that buying the near contract and selling the far one is at most times profitable, which we think is a sign that these futures may go up in the long run. The best time to enter or leave the above spread is when it is at -11.00 or narrower buying the far as prices are rising and then selling the near, and exiting or entering when it is at -12.95 or wider selling the far as prices are falling and then buying the near. At this time, we appear to be approaching the sell the far, buy the near point.





Level Table:

Level Table

The path of least resistance is up.
150.0|                                                                  T  2/20
 CSCE- Jul-19 Coffee "C", 37500 lbs, c/lb.   Cm.=0.08  Lim.= 0.8
     |
     |
     |AAE
145.0|AAEEE____________________________________________________________________
     |AAAAAABEEEFG
     |AAAAAAABBBBBEFGG
     |AAAABBBBBEEEFFGGH
     |BBBBBBCCEEFFGGHH
140.0|BBBBBCCCCCCCDDDEEEFFGGGGGGH______________________________________________
     |BBCCCCCCCDDDDDDEEEEFFGGGGGGGH
     |BCCCCCCDDDEEEEFFFFFGGH
     |CCCDEEFFGGHH
     |DEFFFFGHHHHR
135.0|DDDDEFHHHHHJRRS__________________________________________________________
     |DDDHHJJJRRSS
     |HJJJJJJJRRRRSSSS
     |JJJJJJRRRRRSSSSS
     |JJJJKRRRSSSSS
130.0|KKKKKRRRRRSSSSS__________________________________________________________
     |KKKKKRRRRRSSS
     |KKKKKKLLLRRRRRSSSST
     |KKKKKKLLLLMRRSSSST
     |KKKKLLLLLLMRSSSSTTT
125.0|KKKKLLLLLLMMMMRSSSSTTT___________________________________________________
     |KKKKLLLLLMMMRRSSSTT
     |KLLLMMMMMQQRRRSSSTTTT
     |KLMMMMMMQQRRSTTTTTT
     |MMMNQQRRTTTTTTU
120.0|MNNQRTTTTTTTUUUU_________________________________________________________
     |MNQQTTTUUUU
     |NQQQTUUUU
     |NNQQQQUUUU
     |NNNNOQQQUU
115.0|NNNOQQUU_________________________________________________________________
     |NNNOQUU
     |NNOOOQUUU
     |NNNOOOOOOOPQQQUUU
     |NNNNOOOOOOPPQQQUUVVXYY
110.0|NNNNOOOPPQVVXXXXYYYYYYYZZZ_______________________________________________
     |NOOPPPPQVVVVXXXXXYYYYYZZZZZ
     |OPPPPQQVVVVWWXXXXXYYYYYYZZZ
     |PPPPQQVVVVVWWWWWWWWXXXXXXXXYYYYYZZ
     |PPPPQQVVWWWWWWWWWWXXXXYZ
105.0|PPVVVWWWWWWWWWXXZZZ______________________________________________________
     |PPVVVWWWWWZZ
     |VZZ
     |ZZ[[
     |[[   <<<
100.0|-A-B-C-D-E-F-G-H-J-K-L-M-N-O-P-Q-R-S-T-U-V-W-X-Y-Z----|----|-- TPO=-0.059
                                       1 1 1 1 1 1                    
       2 3 3 4 4 5 5 6 6 7 7 7 8 8 9 9 0 0 1 1 2 2 1 1 2 2           2
       2 0 2 0 2 0 1 0 1 0 1 3 1 2 1 2 1 2 0 2 0 2 0 2 0 1           2
       3 8 2 6 0 4 8 4 8 2 7 1 4 8 2 6 0 4 7 1 6 0 7 1 4 9           0


Other Factors

Multiple Chart Indicators Summary
Multiple Chart Indicators Summary


Here's an intraday chart for a previous day ( 2/26 ).

Intraday Chart


                 Risk Versus Opportunity Report
                ________________________________

                   KCN9    July Coffee

                      High Price:  107.78
                   Current Price:  102.7
                       Low Price:  92.29

                            Risk: -0.102
                     Opportunity: -0.208

                    (O/R) Ratio =  2.049


Overall Recommendation

Decision Weighting Factors
FactorsWeighted Points
Inter-Market Analysis + 1
Parabolic Chart - 1
Nirvana Chart - 1
News - 1
Point & Figure - 1
Cyclicals + 1
Seasonals - 1
Internal System 1 - 1
Internal System 2 0
Third System - 1
Historic Range + 1
Commitment of Traders + 1
Range/Volatility + 1
Level Table - 1
Other Factors - 1
Total - 4
Place 5 July Coffee on a Sell Watch with stoploss @ +4.35 above the get-in point when recent price is represented as "102.70".
____________________________________________________________________________________________________________________________________________B.I.