The Hightower Report

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A firm dollar and weakness in outside markets looks to help pressure the market to start the day but coffee seems to be a market with firm short-term cash fundamentals and a market in which we will see some increased interest from commercial traders on corrections. The Brazil harvest does not get going too significantly until June and cash premiums are still relatively high for Colombia and neighboring Central American countries. May coffee was able to capitalize on a weaker Dollar and moved towards its highest price since late January yesterday posting solid gains on the session. With much of Europe still on holiday, there was little resistance put on prices as they probed to the upside. London was closed on Monday and started with a firm tone today. Also lending support to prices was the strength in other commodity markets as well as new highs in the US stock market. A general theme of improving global demand due to an improving global economy has helped support coffee and several other commodity markets recently. Costa Rica exports for the October 1st to March 22nd time frame have reached 1.185 million bags which is down 3.8% from last year. El Salvador production for the October 1st to February 21st time frame has reached just 1.028 million bags which is down 28% from last year. The COT reports on Friday (as of March 30th) showed a fairly aggressive buying trend from non-commercial traders (funds) who increased their net long position by 8,818 contracts for the week to 21,850. The buying is seen as a short-term positive force and the market is not close to an overbought condition. Daily ICE certified deliverable coffee stocks fell by 10,422 bags to 2.589 million with 59,858 bags pending review.

TODAY’S GUIDANCE: The market seems to have completed the base-building process and looks poised to continue to grind higher but is a bit overbought. A large Brazil harvest ahead is likely already “priced” so any surprises will likely favor the bull camp.

TODAY’S MARKET IDEAS: Short-term support levels for July coffee include 139.50 and 138.90 with 142.30 and 143.40 as next upside targets. Look for choppy but higher trade just ahead.

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The market seems poised for a resumption of the uptrend after reaching the high end of a two-month consolidation. The surge higher in London could attract some increased producer selling ahead but at least the issue of defaults from Vietnam exporters should subside. Rains have delayed the harvest in Indonesia and the lack of producer selling in Vietnam has left many exporters short on supply to make commitments. Vietnam officials revised exports in February lower and believe that March exports were near 1.83 million bags, down 19.2% from last year. This pushed six month cumulative exports to 10.16 million bags, down 9.2% from last year’s pace. May coffee was able to extend this week’s rally yesterday as the market moved toward the highs for the past several months. Calmer trading in the Dollar along with continued problems with export defaults in Vietnam gave the market some support. A reduced forecast for production in Guatemala, partially due to lower rainfall and less fertilizer usage, could point to other countries in that area having difficulties with this season’s crop as well. London July coffee surged 4.4% to close at the highest level since February 3rd. Daily ICE certified deliverable coffee stocks were down 53,003 bags to 2.612 million with 74,332 bags pending review. Uncertainty on the quality of the Brazil crop and a continued slow recovery of production from Colombia may cause the market to build a minor weather premium ahead of the Brazil harvest.

TODAY’S GUIDANCE: The improving technical action and a sense that fund traders are searching for commodity markets which might see some supply tightness ahead indicates that the coffee market could benefit from any shift back toward the commodity sector if the dollar begins to retreat.

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The coffee market managed to hold support this week (unlike other soft markets) and seems to be in a position to see some upside over the short-term. Traders remain concerned with the potential for a large crop from Brazil this year but the short-term cash fundamentals still look relatively tight and the Brazil harvest does not get going for another few months. Vietnam is in the process of developing their government-backed stockpiling plan which will eventually hold 200,000 tonnes of coffee off of the market and in storage. Producers seem reluctant to sell at lower price levels. Vietnam has exported 522,600 tonnes for the October to February time frame, down 2.4% from last year. May coffee finished higher yesterday, but well within the range of the previous two sessions as weakness in the Dollar helped to support prices. Outside market forces are supportive to the coffee market today with higher gold and energy markets and a weaker US dollar and this may help spark some buying support. Daily ICE certified deliverable coffee stocks were up 2,843 bags to 2.681 million with 33,845 bags pending review.

TODAY’S GUIDANCE: The two-day break failed to do significant technical damage to the coffee market and the base-building process seems to be on-going. A move over 133.90 will be necessary for May coffee to assume a near-term low is in place which will leave 136.90 and 139.60 as upside targets. Support comes in at 131.70 and 130.10.

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Traders have been focused on the potential for a big crop in Brazil which will help ease tightness in the cash market for the past month but the market may have already “priced in” the large Brazil crop and the focus may shift to spot market tightness ahead of the harvest. Cash premiums remain high for many Central America growths led by Colombia but traders see better production from Colombia for the harvest this fall. The head of the International Coffee Organization believes the world coffee production for the 2009/10 season will reach near 126 million bags which is up from a previous estimate of 124 million. Consumption is thought to be near 134 million bags per year. Therefore, a jump of near 8 million bags for the Brazil crop this season would just help the market avoid a production deficit but will not help build stocks. While we could see a slight world production surplus this season, the surplus should be small and there is still the potential for quality issues due to uneven flowering. May coffee surged higher to break-out to the upside of a 10-session trading range yesterday. The rally also penetrated the downtrend channel resistance and this may have added to the technical buying support. A strong US dollar and weakness in other commodity markets kept the market under pressure early but ideas that it will take more time to see less “tightness” in the short-term supply ahead of the Brazil harvest, and that it will take longer for Colombia to see production back to normal, helped support the solid gains. The Coffee growers federation of Colombia believe Colombia production was just 650,000 bags in February as compared with 868,000 bags last year. Traders believe that March production will be higher than February and that April will be higher than March and so on but the recovery in production is coming slower than expected. This was an annual pace of 7.8 million bags and traders see 2010 production near 11-12 million. On top of an improving chart picture, the steady rise in open interest off of an early March low during a period of base-building is seen as a positive development. Daily ICE certified deliverable coffee stocks were down 23,200 bags to 2.729 million with 3,413 bags pending review.

TODAY’S GUIDANCE: The upside break-out is impressive and the May coffee should find close-in buying support near 132.02 with 136.05 and 138.45 as upside targets.

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The market is probing for a near-term low and there seems to be enough uncertainty on the longer-term supply outlook and enough tightness in the near-term cash market to forge a low soon. The market may see another leg down into the heart of the harvest this summer but the recent sell-off is likely enough to attract significant end user support. May coffee closed slightly higher on the session yesterday after choppy and two-sided trade for much of the day. The strong US dollar and a sharp sell-off in sugar pressured the market at times but strength in the Brazilian currency and ideas that world demand should remain strong for coffee helped to support the market. Ideas that the market is oversold after last weeks heavy losses and a continued trend towards declining exchange stocks helped to support. Rain is expected for Brazilian robusta coffee producing areas which have suffered from more than two months of a drought. Traders see losses of 20-40% in many areas which were just too dry and especially too hot in the past few months. Brazil produces mostly arabica coffee but is also the world’s second largest robusta producer outside of Vietnam and the drought effected state of Espirito Santo was expected to produce near 11.5-12 million bags of robusta and arabica coffee this season. Exports from Brazil for the month of February reached 2.08 million bags, about unchanged from January and down from 2.287 million bags in February of 2009. February exports from Honduras reached 608,082 bags which pushed the October to February total to 1.14 million bags, up 40.7% from last year. February exports from Costa Rica reached 150,591 bags which pushed the October to February total to 394,916 bags, down 20% from last year. The COT reports on Friday showed a slight long liquidation trend for coffee with trend-following funds shifting from a net long to a net short position of 394 contracts. Funds were sellers of a net 2,974 contracts for the week and the selling trend is seen as a short-term bearish force. Even commodity index traders reduced their net long by more than 1,000 contracts to a net long of 53,553 contracts. Daily ICE certified deliverable coffee stocks were up 1,505 bags yesterday to 2.772 million with 34,159 bags pending review.

TODAY’S GUIDANCE: It will take a move over 133.90 to turn the minor trend up for May coffee with light support at 131.20 and 130.25. Don’t rule out a recovery to key resistance up near 138.45.

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The technical action is bearish and the market acts like it wants to make another leg down. However, the short-term cash fundamentals do not seem to point to lower prices until there is more certainty that there will be a bumper crop from Brazil this summer. Ideas that the sugar and coffee crops from Brazil for the 2010 season are doing well and that this will help ease any tightness in the world market helped to pressure. The Colombia National Federation of Coffee Growers indicated at production in the first half of the year should reach 5.156 million bags, up 22% from last year. This outlook clashes with trader expectations that Colombia coffee production will struggle to exceed last year’s level. El Nino dryness has already impacted production in January which was 515,000 bags, down 41% from last year and the lowest January production from Colombia in 34 years. May coffee traded sharply lower on the session and experienced the lowest close since February 5th. The market saw choppy to lower trade early in the session but when the sugar market saw a significant sell-off, coffee pushed under Friday’s lows and this sparked sell-stops and further technical selling. Funds were noted sellers on the session in coffee and soft markets in general which helped to pressure. Robusta futures pushed to a new 8-month low which added to the bearish tone. Vietnam cash markets are weak and traders appear un-concerned with developing dryness in some of the key growing regions. Concerns that the strong dollar, weak Brazilian currency trend will continue has added to the bearish tone. Daily ICE certified deliverable coffee stocks were down 4,985 bags yesterday to a 7-year low of 2.818 million with 29,171 bags pending review. This is the 6th session in a row in which stocks fell moderately and the movement could begin to provide some underlying support.

TODAY’S GUIDANCE: May coffee support is at the 130.90-130.35 zone with 139.50 and 141.70 as next key resistance points. If support can not hold, 127.70 becomes next downside count.

TODAY’S MARKET IDEAS: For now, assume support will hold and that we will see an eventual test of the 140.00 level.

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The more positive technical action and the outlook for a tightening supply of coffee on the cash market in the months just ahead helped to support solid gains in coffee yesterday and suggests a near-term uptrend in prices. Outside market forces have been a negative force recently and if financial markets settle down and currencies stabilize a bit, coffee seems to be in a position to see at least a bounce just ahead. May coffee closed moderately higher on the session yesterday as the push under Tuesday’s lows failed to attract new buying interest and the market saw a strong recovery off of the lows. The financial markets calmed down late in the session and the weakness in the US dollar off of the early rally helped support renewed buying interest in coffee from speculators. It was the highest close for May coffee since February 3rd. Nearby futures led the rally with March gaining on other contracts. While the market has been in a downtrend, open interest has pushed to the highest level since June. Coffee exports from Mexico in January reached 259,351 bags (up 12.5%) which pushed cumulative exports for the 2009/10 season to 664,943 bags, up 16% from year-ago levels. El Salvador exports for the season have reached 253,419 bags, down 5%. There is still no word on cold weather damage from Mexico. Costa Rica has cut their production forecast for the third month in a row due to poor weather. Colombia coffee is still trading near $2.05 and at a large premium to the New York futures ($1.34). Daily ICE certified deliverable coffee stocks were down 3,408 bags to 2.902 million with 11,576 bags pending review. The market seems to have the fundamentals to turn up at anytime and firm premiums of futures over cash should help provide some support.

TODAY’S GUIDANCE: May coffee buying support is in the 132.45-131.95 zone with 137.35 and 139.55 as initial resistance.

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The weak technical action and a selling trend from speculators in the COT reports could help keep the short-term trend down. The supply fundamentals still look mostly supportive over the near-term but traders remain nervous with the outlook for a much larger Brazil crop harvest this summer. March coffee closed sharply lower on the session on Friday and closed lower every session last week. March was down 125 points on Friday and lost 790 points for the week. A lack of new news in the cash markets and weakness from outside markets helped to drive futures lower. The surge higher in the dollar and weakness in the Brazilian real along with a further sharp sell-off in many commodity markets helped to pressure. Talk of uneven flowering for the Brazil 2010 crop and the potential impact on quality failed to provide support. Open interest was down 1,025 contracts to 128,297 contracts. The Commitments-of Traders reports for the week ending January 26th showed a light selling trend from speculators who still hold a net long position of over 30,000 contracts. Trend-following funds were net sellers of 3,876 contracts for the week to 30,177. The selling trend is a short-term negative force and selling could intensify if support levels are violated. Colombia coffee is trading near a 77 cent premium to the cash market as compared with 79 cents a week ago and a premium of 29 cents one year ago. The premium has helped keep buyers in a “hand-to-mouth” buying pattern which suggests that commercial buyers will be active on breaks. Poor weather for Colombia and Indonesia due to El Nino has failed to provide much in the way of support recently. Daily ICE certified deliverable coffee stocks were down 1,677 bags to 2.930 million with 51,819 bags pending review. Stocks have fallen to their lowest level in 7 years.

TODAY’S GUIDANCE: The market seems to have the fundamentals to turn up at anytime but for now the short-term trend is down. The 132.25 level for March coffee is a key pivot and next key support is all the way back at 128.20. A move back over 135.30 will be necessary for any hope of a near-term low.

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A further decline in exchange stocks and weakness in the US dollar overnight helped spark a bounce. Fears of managed money long liquidation selling has helped to pressure the market as the Administration proposals cast a negative tone on speculation and increased the risk of selling. Uncertainty leads to backpedaling and this means selling pressure potential for many commodity markets. Keep in mind; index funds held a net long position of 56,673 contracts as of January 12th and hedge funds (trend-following funds) were net long more than 18,000 contracts. March coffee closed 50 lower on the session yesterday but up 115 points from the mid-session lows. Weakness in the stock market and many other commodity markets and talk of ample supply from Vietnam pressuring the London coffee futures helped spark long liquidation selling. The market pushed to the lowest level since January 4th on continued weak technical action in spite of declining exchange stocks and stiff premiums of cash to futures for some coffees. Colombia coffee growers expect to produce near 11 million bags this year after seeing the lowest crop in 33 years in 2009 at just 7.8 million bags. In 2008, Colombia produced 11.4 million bags. The Mexico agriculture minister indicated that the crop for this season will likely fall 10-14% from 4.6 million bags produced last year due to recent cold weather among other factors. Coffee exports in December for Central America, Mexico, Colombia, Peru and the Dominican Republic were 1.776 million bags (down 8%) which pushed cumulative exports for the season so far (3 months) to 4.357 million bags, down 23.8% from last year’s pace. Daily ICE certified deliverable coffee stocks were down 24,341 bags to 2.978 million with 41,764 bags pending review. Stocks are at a 7-year low.

TODAY’S GUIDANCE: The market seems to have the short-term fundamentals to move higher but the technical action remains weak. Support for March coffee comes in at 138.20 and 136.55 with 141.15 and 142.30 as resistance. The 100-day moving average may also provide some support today at 138.70.

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The market looks to be in a good position to continue to trend higher and test the December highs soon. Declining exchange stocks and a tightening cash situation in Colombia and Brazil should help provide underlying support.
While there is some uncertainty on the longer-term fundamentals for the coffee market, the short-term signals from the cash market and the short-term technical signals look supportive. Exchange stocks are in a downtrend and cash premiums remain high. Owners of exchange stocks do not seem motivated to sell with cash premiums high from many key locations. However, buyers seem a little more interested in owning exchange stocks with Colombia coffee spot markets trading 60 cents premium to New York futures and Honduras coffee trading at a 14 cent premium to the board. The bullish action in the cash market is seen as a positive short-term force. Colombia cash premiums are up 8 cents from just prior to Christmas. The market closed moderately lower on the session yesterday after the early rally to the highest level since December 21st failed to attract new buying interest and speculative long liquidation selling was noted into the close. The failure of coffee and other commodity markets to find much support from the much weaker US dollar and sharply higher gold prices helped spark more aggressive selling from speculators to help pressure. Some speculation that coffee areas of Mexico could have been hit with cold enough weather on the weekend to spark some damage helped support the rally on Friday and traders will be monitoring the crop this week to see if damage actually occurred. Brazil exported 2.25 million bags of coffee in December, down from 2.99 million bags in Dec 2008. For all of 2009, Brazil exported 27.34 million bags which is up from 26.03 the previous year. For 2010, the Council of Green Coffee Exporters believes exports will be near 27.3-27.8 million bags. The International Coffee Organization indicated yesterday that world consumption in 2009 increased to near 132 million bags from 130 million in 2008 which suggests that the economy does not have much of a negative impact on consumer demand for coffee. Daily ICE certified deliverable coffee stocks were down 5,932 bags to 3.073 million with 7,387 bags pending review.

TODAY’S GUIDANCE: Buying support for March coffee comes in at 142.65 and 141.10 with 147.60 and 154.70 as next upside objectives.

TODAY’S MARKET IDEAS: Consider buying breaks.