Coffee is a market that spends 80% of its time moving sideways or lower. Thus looking for Bull moves higher entails some risk.Brazilian currency appreciation, La Nina and extreme oversold hedge positions by Money Managers and Large Spec traders all have potential to support a meaningful rally in 2018 above the 130’s to 140’s consensus.
When Oil collapsed in late 2014 from over $110/barrel to 26 in early 2016, Brazil went into a depression and their currency fell to record lows. Coffee also capitulated to multi-year support, demonstrating a very close correlation. Oil, Coffee and the Brazilian Real all rebounded in 2016 as the Global economy and commodities in general rebounded. These markets continued to track each other well until the 4th quarter of 2017 when Oil surged on inventory reductions while the Real moved sideways and Coffee moved closer to decade lows. Despite political chaos, Brazil and Emerging Markets should strengthen in 2018, boosting the Real and providing support for Coffee. Once the Real moves above its 3240’s resistance of 2017 we should see an uptrend underway in Coffee.
Like the Real and Coffee, Oil and Coffee also move together due to tethering of Emerging Markets like Brazil with key industrial commodities like Copper and Oil. Since September 2017, Oil has surged in part due to inventory reductions, but more recently because of fears over Iranian turmoil. So far, this $16/barrel run higher in Oil since September has not elevated the Real or Coffee. We expect some normal narrowing of this spread in coming months. Soybeans, another major Brazilian crop, should also benefit when the Real breaks higher.
A major exogenous factor aside from currency and economic trends is the weather. Predicting the weather more than a couple weeks away lacks accuracy. Determining the relationship of El Nino and La Nina extremes with future weather and crop supplies months later is a bit of alchemy.To indulge for a moment, there does appear to be “some” correlation with La Nina and colder extreme temperatures in the US and various crop concerns throughout the Americas, but difficult to quantify. The current La Nina should be reaching a moderate climax this month which “can” create crop troubles in the America’s in 2018.