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IS COFFEE BECOMING A BITTER BEAN?


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Be advised that all my comments are my OPINION and that OPINION is based on my long term in-house model that I dubbed LAWG 647. The prices I use in my model are week ending prices, usually Friday. BTW, trading commodities is risky and not meant for those that faint at the sight of blood.

May 18, 2020

IS COFFEE BECOMING A BITTER BEAN?

Last weeks four dollar and eighty-cent break in July coffee was not good news for Coffee Bulls. If July Coffee had closed on Friday, May 15 at or above $113.30, or a one per cent increase in price week over week, July Coffee would have turned bullish. Instead July Coffee closed at $106.85. As of the close on Friday last July Coffee will need a close on May 22 at or above $131.90 to reverse the trend, a twenty-three per cent increase in price.

What do we know about the fundamentals?

We know that the weakness in Brazilian and Colombian currencies have encouraged producers to sell causing greater available supply. The supply of near term high quality Arabica coffee continues to be tight and impact of Covid-19 is slowing the movement of Coffee to ports for exports. Covid-19 continues to be the source of demand destruction.

This begs the question with individual States having re-opened on June 1st will demand destruction begin to ebb and demand noticeably increase?

What does the Model tell us?

We know that last Fridays close was not good news for the bulls. Coffee was so close in confirming a long term trend change and failed badly. I have said in previous articles according to the Model if a commodity becomes very close to a trend change and fails badly that commodity, in my opinion, will aggressively trade in the direction of the underlying trend.

As mentioned in the first paragraph we need a close this Friday, May 22 at or above $131.90. Further bad news for the bulls is that without a major fundamental change July Coffee may not be in a position to reverse the trend for at least six weeks.

Unfortunately that is not where the bad news for the bulls ends. According the Model Coffee is not even close to being oversold. The Model tells us that the Negative Indicator is only slightly above the first standard deviation of the long term average. It is a long way from being at or above the third standard deviation, which where I would be inclined to counter trend buyer.

What will it take to change the trend in Coffee in the near term?

In my opinion it will take a significant fundamental issue, perhaps a surprising increase in commercial (cafes and restaurant) demand. A significant drop in export supplies due to Covid-19. An ever decreasing supply of high quality Arabica coffee could give Coffee a boost. Who knows, but it will be a fundamental change.

What to do?

Barring the aforementioned fundamental comments, I suggest if one understands the risk look for rallies to aggressively sell. Challenging my partners, Tom Fritz and Steve Erdman both contributors to Inside Futures, for where they suggest shorting July Coffee Tom is the most aggressive with a price at $108.75, I am next at $111.00, and Steve is at $111.90. I expect $103 to provide some short term support and then look out below, but that is just my opinion.

My name is Lee Gaus and if you would like to see more of our thoughts go to our website ifgfutures.com. There you will also find articles written by my partners Tom Fritz, Steve Erdman. If you have any questions you can reach me at 1-877-304-1369, 312-384-1166, or email me atlleegaus@efggrp.com. If you have a commodity you would like me examine feel free to drop me a quick e-mail atlee@efggrp.com, I will do my best to accommodate.

There is significant risk involved in trading futures and/or options on futures.



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About the author


Lee A. Gaus is a forty year veteran of the commodity futures industry.  After graduation from Illinois State University Lee began his professional career with Cargill of Minneapolis and then moved to Archer Daniels Midland of Decatur, Illinois.  After stints in the areas of animal nutrition, soybean processing and grain merchandizing Lee began specializing in commodity futures trading.  After being transferred to Chicago Gaus rose to the position of Senior Vice-President.  In 1992 Gaus was a founding member of EFG Group, and later International Futures Group.  Gaus has always had a deep interest in what appears to be the random movement of numbers.   Today Gaus combines old formulas with formulas of his own design in an attempt to discover fair valuations.  

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