DJ ICE Coffee Review: September Rallies 3.4%, Recoups Losses

Arabica coffee futures for September delivery rallied Wednesday, as bullish chart influences and the strength of key outside markets helped coffee to recoup Tuesday\’s sharp losses.

Most-active September coffee rose 5.40 cents, or 3.4%, to settle at $1.6305 a pound.
A combination of speculative buying and traders buying back previously sold positions lifted coffee, with an additional boost provided by outside market strength, traders said.

A gain of 2.9% in crude oil, a steady to weaker U.S. dollar and the Dow Jones Industrial Average up 2.4% encouraged traders to buy riskier commodity investments. The major commodity indexes posted gains of 1.5% to 2.3% on the day. \”Short term, coffee was oversold the last couple days on light volume,\” said Alonso Tomas, a coffee trader at Hencorp Futures in Miami.

In addition, bullish charts were an influence as traders closed an upside gap on the September chart that was left from Tuesday\’s lower opening. The desire to fill that gap during the session provided chart-watching bulls with ammunition, Tomas said.

Coffee futures were in \”recovery mode\” Wednesday on sentiment that Tuesday\’s losses were overdone, said Jack Scoville, an analyst and vice president at Price Futures Group in Chicago.
Fundamentally, supplies of quality arabica beans remain extremely tight and hedging pressure is muted.

\”There\’s no deliverable grade coffee around. Brazil is not a deliverable origin\” against ICE futures, \”even if they did meet quality standards,\” said Scoville.

Brazil is the world\’s largest coffee grower, but its crop isn\’t deliverable against ICE futures, which are high-quality washed arabica beans. Poor harvests in Mexico, Colombia and Central America have left the highest-quality beans in very short supply.

Coffee output in Colombia, however, is expected to climb this year on improved growing weather. Colombian coffee production will likely reach between 10 million and 10.5 million bags, up from 7.8 million in 2009, Colombia\’s

National Federation of Coffee Growers, or Fedecafe, said Wednesday. Technically, action so far this week has left a double-bottom support area in September coffee at $1.5685-$1.5705. While coffee futures could trade lower, Scoville sees downside potential limited given the tight supply situation.

\”Everyone wants to get all bear-ed up, but there\’s no fundamental reason in ICE coffee to do that,\” he said. ICE warehouse stocks fell 10,792 bags to total 2.182 million 60-kilogram bags, the exchange reported.

Total open interest on ICE fell 4,025 to total 165,787 lots. Just 188 contracts remained open in nearby July ahead of its July 20 expiration.

Futures volume is pegged at 18,602 contracts, with 6,726 calls and 3,662 put options traded.
ICE Change (cents) Range
July $1.6065 up 5.15 $1.5550-$1.6065
Sep $1.6305 up 5.40 $1.5705-$1.6395
-By Tom Sellen, Dow Jones Newswires; 913-322-5177; tom.sellen@dowjones.com