For the better part of three weeks, coffee prices have largely been range bound consolidating just above their recent lows. The market is in the process of digesting a massive Brazilian crop and the outlook for a potential record crop again next year. Brazil is the 800 lb. gorilla that should serve as a supply burden in the coffee market. Additionally, coffee is factoring in a strong recovery in the Colombian coffee market where exports are increasing and production is expected to near 10 Million bags in 13’, up from 7.7 million last year -- two bearish supply factors and likely good cause why prices will not return to the $140/$150 levels seen four months ago. Still, I think we could see, in the coming weeks, a $130 trade.
The Real's Recovery
This week December futures look to gain for only the second week in the last five weeks on the back of a recovery in the Brazilian Real. Continued strength in the currency could ease pressure on exports that were previously being aggressively marketed. Technically speaking, futures remain oversold and I would not rule out a short-covering rally if we see futures trade above their 50-day MA (red line).
Assuming the bottom red line serves as support and, with an objective at the upper red line drawn on the chart above, I like the risk/reward dynamic, 2-3 cents of perceived risk and 10-12 cents of profit potential. My favored play is long December futures using an options leg as protection, either purchasing a November put or selling a December call 1:1 against the futures.
The idea is to make more money in the future leg than you lose in the options leg.