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Coffee Hits New High, But Could It Move Even Higher?

By Andy HechtCommoditiesNov 26, 2021 06:36AM ET
www.investing.com/analysis/coffee-hits-new-high-but-could-it-move-even-higher-200609616
Coffee Hits New High, But Could It Move Even Higher?
By Andy Hecht   |  Nov 26, 2021 06:36AM ET
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This article was written exclusively for Investing.com.

  • Brazil is the leading Arabica coffee producer
  • A frost in July lifted the price to a multi-year high
  • Two other Brazilian agricultural commodities rallied to the highest prices in years
  • Coffee makes a higher high in November
  • The fourth trip to $3 per pound could be on the horizon

Coffee futures on the Intercontinental Exchange were below the $1 per pound level in July 2020 when they eclipsed the level and have not looked back. One year later, in July 2021, the price doubled, moving over the $2 level for the first time since October 2014.

Bull markets rarely move in a straight line, and corrections can be brutal, shaking the confidence of the most committed bulls. Coffee’s upside percolation ended in July, with the price dropping to a low of $1.7160 per pound in August. In October, the price climbed back over the $2 level, and in November, after consolidating and digesting the previous gains, coffee futures rose to a new high above the 2014 peak.

Coffee futures have risen during an almost perfect bullish storm for the soft commodity. Aside from inflation and supply chain bottlenecks, the weather in the critical growing region has not cooperated with Arabica coffee bean production.

Brazil is the leading Arabica coffee producer

Brazil dominates the soft commodities arena. Sugar, coffee, cocoa, cotton, and frozen concentrated orange juice futures are the members of the sector that trade on the Intercontinental Exchange. Brazil is the world’s leading producer and exporter of free-market sugarcane, Arabica coffee beans, and oranges.

While Brazil is a political and economic mess, its soil and climate make it one of the leading commodity-producing nations worldwide. The weather conditions in Brazil are critical for annual sugar, coffee, and orange crops.

Meanwhile, Brazil has suffered along with the rest of the world during the global pandemic. The country has the second most fatalities at over 612,000 and is third for infections, behind the US and India, with over 22 million confirmed COVID-19 cases. The virus has caused significant issues with the Brazilian labor force and supply chain. Rising energy prices have also made it far more costly to ship the soft commodities to consumers worldwide.

A frost in July lifted the price to a multi-year high

While the impact of the pandemic put upward pressure on sugar, coffee, and orange prices, a frost in July added insult to injury, pushing prices to multi-year highs. Coffee plants and trees suffered the most from the cold conditions as many coffee farms lost their annual production. In July, as the cold weather did its damage, ICE Arabica coffee futures rose above the technical resistance level at the November 2016 $1.76 per pound high, reaching over $2 for the first time since 2014.

Sugar and orange juice futures also experienced frost-related rallies, sending prices to multi-year highs.

Two other Brazilian agricultural commodities rallied to the highest prices in years

The start of the global pandemic in 2020 weighed on markets across all asset classes, and Brazilian soft commodities were no exception. The price of nearby sugar futures fell to the lowest level since 2007, when they reached a bottom at 9.05 cents per pound in April 2020.

Sugar Daily
Sugar Daily

Source: CQG

The chart of ICE world sugar futures shows the ascent of sugar prices that reached the most recent peak of 20.69 cents per pound on the continuous contract in November. Sugar traded to its highest price since February 2017.

Orange Juice Daily
Orange Juice Daily

Source: CQG

In September 2021, frozen concentrated orange juice futures moved to a high of $1.48 per pound, the highest price since October 2018. The frost impacted sugar and orange prices, but the price action in coffee shows that the Arabica crop suffered the most profound damage.

Coffee makes a higher high in November

Coffee futures broke out to the upside in July 2021 when the price eclipsed the late 2016 $1.76 high.

Coffee Daily
Coffee Daily

Source: CQG

As the chart illustrates, ICE coffee futures continued to rally, moving above the next technical resistance level at the October 2014 $2.2550 high in November. On Nov. 24, the price was above $2.40 per pound, a level not seen since 2011 after rising to a high of $2.4755 per pound. While sugar and orange juice futures moved higher, coffee futures exploded and continue to make higher highs in November 2021.

The fourth trip to $3 per pound could be on the horizon

The next technical targets in the ICE Arabica coffee futures market stand at the September 2011 $2.9175 high and the May 2011 $3.0625 per pound peak. The bullish price momentum could push coffee futures above the $3 per pound level for only the fourth time since the 1970s.

Coffee Annually
Coffee Annually

Source: CQG

The annual chart shows that aside from the 2011 $3.0625 high, coffee futures reached $3.18 in 1997 and the all-time high of $3.3750 in 1977. While the peaks reveal a long-term pattern of lower highs, a move above the $3.0625 level would erase that pattern, which could lead to a new all-time peak.

As of Nov. 24, the path of least resistance in the coffee futures arena remained higher. The bullish price action has taken the price to a decade high. Bull markets tend to move to irrational, illogical, and unreasonable levels before correcting.

Coffee is a highly volatile soft commodity, and it continues to percolate higher as we head into the 2021 holiday season. Technical indicators point to higher prices. The supply issues caused by the pandemic and weather event in July could continue to be a potent bullish cocktail for the coffee futures market.

The most direct route for a risk position in Arabica coffee is via the futures and futures options on the Intercontinental Exchange (NYSE:ICE). Meanwhile, the iPath Coffee Subindex TR ETN product (NYSE:JO) does an excellent job tracking the coffee futures. On Nov. 24, the JO ETN was at the $66.63 per share level. The ETN has $162.746 million in assets under management, trades an average of over 82,000 shares each day, and charges a 0.45% management fee.

The risk of a correction in the coffee market is rising with the soft commodity’s price. However, the trend is always your best friend in markets, and in coffee, it is higher with technical and fundamental factors supporting the price action.

Coffee Hits New High, But Could It Move Even Higher?
 

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Coffee Hits New High, But Could It Move Even Higher?

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Comments (2)
Sam Iam
Sam Iam Nov 26, 2021 12:16PM ET
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Coffee looks great. On the point-and-figure chart, it shows Ascending-Triple-Top-Breakout on November 23. MACD looks good. RSI is pegged over 70 at 73.14 (Wednesday's closing). Very bullish on coffee.
Nguyen Thai
Nguyen Thai Nov 26, 2021 7:40AM ET
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Black Friday, why coffee is not down
 
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