Looking to the Futures
Traders Consider Longevity of Premium Coffee Prices
Tight supplies and strong demand have come together to jolt December coffee futures to 7-year highs, and markets seem to be divided on which direction the next move will be. Futures for December delivery of Arabica beans are trading near $2.09 a pound as weather-related supply concerns and shipping logjams have kept the commodity priced at a premium. Coffee prices have moved up about 63% year-to-date.
One way or another, supplies of high-quality coffee beans should eventually rebound as the current high prices throttle a rebound in production. Bloomberg cites a Citigroup Inc. report calling for a moderation in prices based on improving weather in #1 Arabica bean producer Brazil, and they see $2.15 per pound as unsustainable. While prices could maintain elevated levels into next year, the second half of 2022 should bring liquidations if growing conditions return to normal, according to the report. Other Bloomberg sources don’t see high coffee prices quite as transitory, with one analyst seeing the potential for $3.00 a pound if the $2.152 July high resistance level is pierced. Coffee futures haven’t traded at $3.00 since May of 2011.
Brazil saw bean exports fall 24% in August, the lowest seasonal output since 2017. The nation’s coffee export council cited logistics and the lack of shipping containers as the primary restraint. Exports for September were even worse, dropping 30% year over year.
The December 2021 futures contract was down about a penny per pound Friday morning, trading near $2.08 which is up about 7.5% for the month. The front contract is holding at some of the most elevated levels since 2014. The 5-year average price for the rolling front contract stands at $1.22. The highest observable coffee futures price over the last 25 years would be around $3.18 from May of 1997 and the lowest was $.46 in 2001.
Arabica coffee futures have still been the leading year-to-date performer (+63%) in the “softs” futures group, which includes cocoa (-1%), sugar (+26%), cotton (+35%), and lumber (-12%).
Looking farther out in time, futures contracts calling for coffee delivery in the years to come currently trade at a premium to the spot market, a condition known as contango.
Coffee futures trading volume in August was 1.2 million contracts, the highest in the past year, but September volume dipped to a 10-month low of 663,287. Daily volume in the December 2021 futures hit nearly 40,000 contracts August 12 as traders rolled from the September contract to the new front month of December, but the current 15-day moving average for volume is 17,728 contracts.
Even with the fall-off in September trading volume, 2021 volume is on pace to match last year’s activity when 12.6 million contracts traded. The highest level of observable volume in coffee futures occurred in 2019 when over 15 million contracts were traded.
The Coffee C futures contract controls 37,500 pounds of Arabica beans. With the recent volatility in the coffee market, margin requirements for December 2021 coffee futures have been increased to $9,900, representing about 12.5% of the contract value. Options on coffee futures contracts are also available with strikes spaced 2.5 cents apart. Implied volatility on coffee futures options has maintained at elevated levels, with short-dated, near-the-money options expiring November 12 showing I.V. in the low-40’s. This metric for front-month options was reading in the mid-30’s a month ago, but near 70 over the summer when futures spiked to contract highs.
Out-of-money calls expiring November 12 carry implied volatility near 50 and pockets of high open interest are led by the $2.40 and $2.50 strike calls with 3,583 and 7,332 open contracts, respectively. Stretching up to the deep out-of-money $3.00 strike call, it has IV of 57 and open interest of 1,837 contracts.
Coffee Futures Commitment of Traders Data
According to public data provided weekly by the Commodity Futures Trading Commission, money managers were increasing net-long futures positions in each of the three weeks leading up to October 5 when they held 45,642 net long contracts. This quantity of bullish exposure is near the 1-year high established in early June, which proceeded a July spike in coffee futures. The one-year average for this measurement is net long 28,020 while the five-year average is net-short 15,633 contracts. New data will arrive Friday October 15 at 3:30 p.m. ET from the CFTC.
Coffee Technicals KCZ21
According to Hightower technical outlooks, mixed signals were observed for the short-term with a close Wednesday above the 9-day moving average, countered by a close below the pivot number.
Trading Central research observes a setup with the December contract RSI above the neutral level of 50 but with MACD below the signal line. KCZ21 is above both the 20 and 50-day moving averages.
Resistance 2 215.75
Resistance 1 212.50
Support 1 206.15
Support 2 203.05
SMA 9 Day 203.18
SMA 20 Day 197.42
SMA 50 Day 191.84
SMA 200 Day 159.15
RSI (14) .64
Retail Sales 10/15/2021 8:30 a.m. ET
U. of Michigan Sentiment 10/15/2021 10:00 a.m. ET
Leading Index 10/21/2021 10:00 a.m. ET
Coffee Options Expiration 11/12/2021