Wake up your trading with a caffeine boost

UNFORTUNATELY for those of you craving your third Monday morning coffee, feeding that caffeine addiction is getting even more expensive. Over the past week or so, we have seen the price of coffee beans surge by more than 20 per cent, taking them back towards the heady levels last seen at the height of the 2008 commodity price boom.

After such a sustained rally, it was unsurprising that coffee traders booked profits on Friday, pushing the price of New York-traded Arabica coffee for September delivery back down to $1.565 a pound from the highs of $1.62, last seen in March 2008. London-traded robusta coffee, the lower quality version used in instant coffee blends, fell by as much as 2.3 percent on Friday to $1,515 per tonne.

However, these dips are likely to be viewed by traders as a fresh buying opportunity and spread betters should look to capitalise on another move higher. For while the sudden spike to $1.62 per pound was attributed to traders covering their short positions in the commodity, both the technical and fundamental arguments for higher coffee prices is looking as strong as a double espresso.

From a technical perspective, the current uptrend has good support around the $1.35 level and longer-term at $1.10, says CMC Markets’ strategist Michael Hewson. He adds that a break above the current price would open up levels last seen in the mid-1990s. Then, coffee traded well in excess of 250 cents per pound and as high as 318 cents in May 1997.

As with all commodities, the balance of supply and demand plays an important role in shifting the price of coffee. Following poor crop harvests in Vietnam – the world’s largest supplier of low-grade coffee – and Central America, there have been serious concerns about the supply of coffee in the market.

The latest harvest from Colombia, which is historically the world’s largest producer of arabica beans, is coming in below expectations for the second year in a row.

CMC Markets’ Hewson says that the market is also worried about the forthcoming harvest in Brazil, the world’s largest producer of coffee. Even if it does meet previous years’ output, it is by no means guaranteed that Brazil alone will offset shortages seen elsewhere.

The International Coffee Organisation (ICO) also said that world exports of coffee between October and April fell by 8.1 per cent on the same period a year earlier. The number of bags exported therefore fell to 53.3m from 58m in 2009.

Last month, it also revised down its forecasts for world output in the 2009-10 growing season. It now expects 120.6m bags of coffee to be produced, a 1.1 per cent drop on the previous year. Production is expected to pick up in the 2010-11 season to between 133m and 135m bags, according to Nestor Osorio, executive director at the ICO.

But while production is predicted to fall in 2009-10, world consumption in 2009 is expected to pick up to 132m bags compared to 130m bags in 2008. Extrapolating this to 2010, we should see consumption rise further to around 134m bags.

With demand rising and supply constrained, market forces dictate that the price of coffee should continue to rise. All of the major spread betting providers offer contracts on both arabica and robusta coffee – the spread is wide, though, at around 35 basis points.

But with plenty of upside and volatility, you should give your portfolio a caffeine hit.

The rise and fall of sugar over the past year has been the one of the biggest stories in the commodity markets. The price peaked in January of this year, reaching $0.30 per pound. But it only stayed briefly at this lofty high, before a downhill slide to the $0.15 mark. So why did it happen? It’s all down to India, which is crucial to the sugar market since it is not only the world’s largest sugar consumer, but along with Brazil, is one of the largest producers. After a shock fall in Indian sugar production, subsequent revisions upwards caused the markets to worry about over-supply. Estimates at the start of this year forecast a disappointing crop of 13-14m tonnes, however, these forecasts were revised up to 18.5m tonnes. Globally, production is expected to fall only slightly below demand this year. Adding a further dampener to prices, consumption growth in 2009-2010 is expected to come in below the long-term average. But what about the future? Soc Gen analysts agree that any surplus this year will be limited. On top of that, the fall in the price will lead to fewer farmers growing sugar cane this year, giving prices a chance to recover. They expect prices to stay above $0.14 per pound for the rest of this year.

Kathleen Brooks