Fundamentally, coffee prices are sure to fall due to the one of the largest harvests expected for Brazil. Maybe not, Farmers are looking at few reasons why not to sell there coffee at these low prices.
First of all, the value of the USD is a real concern for coffee farmers. The dollar bought 1.9 reals this time last year, and only 1.6 now, a fall of 15 percent, wiping out most of the rise in coffee prices since July of 2007.
Second, the rising costs of fertilizer, agrochemical, fuel, debt and labor costs. Most farmers are believing they are actually losing money by the time it is all said and done.
Third, government issue subsidies play major role in the farmers selling price. Most government subsidies issued to coffee growers are structured on certain prices. The farmer will receive the subsidy if the minimum price requirements are met. This gives the coffee farmers more intuition to sell at higher prices.
Technically, coffee is looking at a 62% retracement of last upward move. The last upward move was also a 62% retracement of the previous drop. Coffee looks like it has found support at the 140 level for the September contract and the 145 level for the December contract. It has been trading lower on lower volume with open interests increasing. Which gives us the notion that money is starting to flow into this commodity. Mostly due to the fact that coffee has been in such a strong yearly up trend.
The trade recommendation for coffee would be to Buy the December 155 call and sell the December 170 call for $1125 or 3.00 cents. The maximum profit potential if coffee closed above 170 on expiration would be $4,500.00 minus commissions and fees. The option has about 16 weeks left. It does not expire until November 11,2008. That should give coffee plenty of time to adjust to harvest and also with the upcoming coffee drinking season. Money management would be to exit this coffee trade if your option spread lost 33% of its value or if coffee closed beneath major support at 135.
Past performance is not necessarily indicative of future trading results. Trading advice is based on information taken from trade and statistical services and other sources which Transworld Futures believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades. All trading decisions will be made by the account holder.Futures trading involves substantial risk of loss and may not be suitable for all investors.
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