Text transcript of this interview:

1. Arabica coffee futures on ICE rose to a 3-1/2 month high at the beginning of August, do you think coffee futures will continue to rise during the short term?1. Arabica coffee futures on ICE rose to a 3-1/2 month high at the beginning of August, do you think coffee futures will continue to rise during the short term?

I do feel as though the path of least resistance remains higher in Arabica coffee futures traded on the ICE exchange.  However, I also believe the upside will be relatively limited.  Based on the latest Commitments of Traders Report issued by the Commodity Futures Trading Commission, there is still a significantly bearish position being held by speculators.  Unfortunately for them, it feels like prices will continue to squeeze them out of bearish trades, which forces futures traders to buy back their short futures. This, combined with concern over the quality of current supply, should keep the price of coffee grinding into the mid-$1.50 area but we doubt prices will find a way to move above such levels.

2. Thanks to the El Niño climate phenomenon the two-year drought that was threatening coffee production in Brazil seems to have lifted. However, experts suggest the country is not out of the woods yet. Do you see this continuing to influence coffee futures?

In my opinion, most of the El Nino weather concerns have already been incorporated into pricing. The coffee market has built in a premium to account for it.  Residual concerns will likely help move coffee prices higher in the near-term but again, I suspect $1.55ish will be a ceiling for Arabica coffee futures. 

3. Rodrigo Costa, director of trading at Comexim USA, has said the coffee market has been following the whims of the commodity index, not the fundamentals of the coffee market. What do you make of this statement?

I do agree that the coffee market is being influenced by outside forces.  However, in my opinion, it’s correlation with other commodities is the direct result of changes in the currency market.  For instance, when the US dollar moves lower it creates a scenario in which commodities priced in dollars appear cheaper than they once did with all else being equal.  Accordingly, the price of those commodities often moves higher in sympathy as low prices lure demand.  On the flip side, a higher dollar often puts pressure on dollar priced commodities due to discouraged demand.  The US dollar is down 7% on the year which has offered support to the commodity markets, including coffee.Although the negative correlation between coffee and the greenback will vary in degree, it is currently significant.  Over the previous 180 trading days the two markets have settled in opposite directions roughly 66% of the time.  Further, the coffee futures market bottomed in late-June at the precise time aggressive sellers appeared in the dollar index futures. With this in mind, if the dollar finds a way to recover as we think it will, the price of coffee will eventually suffer.

Futures and Options Trading Booksby Carley Garner

What People are Saying about Our Commodity Trading Books

Choosing a Futures Broker and Brokerage Service

Full-Service or Online Trading?

The decision to trade online or through a full-service commodity broker will undoubtedly make a large impact on your bottom line.

Learn More

A Fair Commission Rate vs. Low Commission

To look at commission rates objectively, we must understand the background of the futures industry and how brokerages accept risk for fees.

Learn More

Choosing a Commodity Brokerage Firm

Deciding on a commodity brokerage firm is a significant decision and shouldn’t be taken lightly. Not all traders and brokers are compatible.

Learn More

Choosing a Futures and Options Broker

Most traders in search of a futures broker are concerned primarily with trading platforms, commission, and quality guidance.

Learn More

The Truth about Futures Commission

The goal of futures trading should be to MAKE money, not SAVE it! Discount commodity brokers cut corners that cost their clients time & money.

Learn More

Commodities via Futures or ETFs?

A key difference to trading commodity futures over ETFs is leverage, but there is more to discuss, such as taxes, market hours, and efficiency.

Learn More