The coffee market has had an impressive run the past couple of weeks. Although the Arabica coffee (primarily grown in Brazil) doesn't appear to have any major nearterm shortages, the NYBOT coffee market has rallied to a near term resistance level of 11400 basis December. The rally is attributed to a few factors including a decline in the US stocks to 3.64 million bags. Last week, slightly less than 80,000 bags were pending grading. As of this morning, that number dropped to 60,678 bags of coffee pending grading. Since the London Robusta coffee (primarily grown in Vietnam) is in tight supply with a slightly smaller than bumper crop expected, it is believed that the US stocks are being bought up to meet current spot demand.

Amongst other things, the Brazilian crop is in the blossoming stage. At first glance, the flowering is spotty leaving speculation that next years crop may not be as solid as previously expected.

According to Hightower, the funds are currently only long 6500 contracts which is technically bullish. A rally and close above 11425 would likely encourage more buying interest in the coffee market. On the flipside, a close below 11020 could encourage nearterm selling action. According to an article written by Judith Gaines, longer term fundamentals for the next 3 - 6 months remain bullish for coffee.

Chart Copyright 2006 CQG, Inc.

Recommendation: Buy December Coffee for 11425 SCO risking the trade to a close below 11020. You would be risking at least $1500 per contract. The first notice day for December coffee is November 22nd. Therefore, you may choose to look at purchasing the March contract instead of December.