In 2015, coffee futures was one of the worst performers among commodities. The strengthening of the US dollar against the currencies of major coffee producers such as Brazil and Colombia largely contributed to the decline in the price. Furthermore, the recovery in the Colombian output following the replanting program commenced earlier this decade and better weather in Brazil’s arabica growing state also acted as a catalyst to the downtrend in the price.
The downtrend continued in January as well. On January 20th, 2016, the price of coffee fell to a two-year low of 106.74 cents a pound. The price decline was mainly driven by a fall in the Robusta prices. The export data, indicating a boost in the coffee exports by 2.6% to 26.9 million bags, between October and December 2015, also ensured a non-recovery in the price of coffee. For the crop year 2016/17, according to Conab, the official crop bureau of Brazil, the first estimate of coffee production in the country indicates a recovery in the production to record volumes of 2012/13 and 2013/14. So, will the coffee futures drop further without any support? A clear picture can be seen only when the demand and supply factors are analyzed in totality.
According to the International Coffee Organization, the demand for coffee beans has increased by 40% in the past 15 years, while the production grew by only 25%. Thus, it can be understood that fluctuations in the annual production outputs have a considerable impact on the price of coffee.
Dryness fears have considerably receded for Brazil’s Arabica coffee-growing regions. Thus, analysts and traders believe that Arabica exports will not suffer. However, in spite of the good yield from Vietnam, an important exporter of the Robusta, a shortfall is expected in global supply. The reason is that drought in Espirito Santo (Brazil), the principal state producing the variety, is expected to see a decline in the output below last year. Dry weather in Colombia due to El Nino and crippling drought in Ethiopia are also expected to bring down the production of coffee beans.
The coffee market already remains in deficit. Last year (2014-2015), the deficit was estimated to be about 7million bags. For the current year (2015-2016), the deficit is expected to be about 2.5 million bags. Still, the price continues to remain under pressure. This is mainly due to the effect of the strong US dollar on the currencies of the commodity-based economies. Thus, going forward, there may not be a huge uptrend in the price of coffee. Still, the deficit scenario would not permit any further decline in the price.
Technically, as shown in the image below, the coffee futures have found support at 114.90 levels. Major resistance exists at 120-122 levels.
Thus, considering 114.90 cents per pound as the rock-bottom price, a binary options trader can purchase a call option with March-end expiry. The strike price for the call option can be 120.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
