Short term
Trade view / 26 July 2016 at 22:30 GMT

Is coffee brewing for a correction?

Managing Partner / Spotlight Group
United Kingdom
Instrument: KCU6
Price target:
Market price:

Forecasts of Brazilian Robusta production have been slashed on the back of continued dry weather in the country's main growing region for this particular variety.

Estimates are suggesting that production could be as much as 22% down on the crop harvest in 2015.

This week the Brazilian statistics agency, IBCG, forecast coffee production in the Espirito Santo region at a 12-year low 5.28mln bags, down 16% from its estimate last month. Brazil's total coffee output was seen at 48.8mln bags, compared to 49.6mln bags forecast last month.

However, has this news already been factored in as the recent uptick in price from US cents 120/lb got going in mid-May just as the US Department of Agriculture (USDA) saw Robusta production at 12.1 million tonnes, down 9% year on year, noting: "...above-average temperatures and prolonged dry spells in Espirito Santo...".

However, what is crucial is that we note that in contrast Arabica prices have rallied so widening the spread between Arabica and Robusta to US cents 60/lb. This is the widest spread since March 2015.

I look at the time-based technical and see that they look like a butterfly, i.e. the very short and the long perspective says buy, while the middle time outlook suggests a sell. Why is there this mixed message? 

Looking at the 3-year chart one can clearly see the start of the latest leg higher in May 2016, however, one might conclude that prices were pushing toward a short-term area of price resistance.

Source: Spotlight Ideas

For that reason, I think it may be worthwhile taking a speculative short position for a short time horizon trade with a tight in place just in case I have completely misjudged the market mood.

Coffee 5-year chart

Source: Spotlight Ideas

Management and risk

Parameters: Coffee September 2016 KCU6 US cents/lb.

Entry: sell 141.605 2030 BST.

Targets: 137.21 ... 132.39 ... 128.50 ... 124.60.

Stop: 147.00.

Time horizon: short-term.

— Edited by Gayle Bryant

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