The coffee futures tried to rally through upside resistance at 12250 yesterday and failed. The market needs to rally through the 12250 resistance level to regain upside momentum in the market. In my opinion, it is simply just a matter of time. The long term picture for coffee appears to be bullish if the numbers released by the ICO are indeed accurate. The ICO is expecting global production for the 2007-2008 crop to be 109-112 million bags with global demand expected to be 118-120 million bags. This translates into a production shortage of 6 - 13 million bags down the road with increasingly tighter carryover stocks.

The long term production trend has been increasing for Brazil over the past 20 + years. However, the 2007-2008 Brazilian crop (starting October 1st) is expected to be in a low production cycle year with potentially a 27% reduction in production. Considering that Brazil holds approximately 29% of the global export market, this reduction more than offsets expected production increases from Viet Nam of as much as 4 million bags. According to Hightower, the Green Coffee warehouse stocks (Brazilian coffee) are at 3.717 million bags as of January 16th. In October of 1996, the stocks made a low of 1.26 million bags. In March 1993, stocks hit a high of 10.045 million bags. The trend appears to be intact for tighter stocks long term which should be supportive to the coffee market.

Chart Copyright CQG

Recommendation: Buy coffee on a close above 12250 basis the March coffee or on a dip near 11800. If you are interested in a position with less risk exposure, consider a bull call spread.