Today's Idea

Some traders who are expecting Coffee futures prices to decline may perhaps wish to explore buying bear put spreads in Coffee futures options. For example, with May Coffee trading at 221.15 as of this writing, the May 215 puts could be bought and the May 200 puts sold for a net debit of 5.50, or $2,062.50 per spread, not including commissions. The total investment in buying the put spread would be the maximum potential risk on the trade, with a potential profit of $5,625 minus the premium paid, which would be realized at option expiration in April should May Coffee be trading below 200.00.

Fundamentals

Coffee futures have been rather quiet recently, with range-bound trade being the norm ahead of 2012-13 output estimates. The most widely watched estimate from CONAB, the Brazilian government agency, is estimating this coming season's Brazilian crop between 49 and 52 million bags, which is well above the 43.48 million bag estimate this past season. The size of the estimate is more surprising given CONAB's history of underestimating the size of the harvest. Among the reasons for the higher estimate are improving weather conditions and better care of Coffee trees, as relatively high Coffee prices have encouraged producers to spend more on their production investments. If the numbers are correct, Brazilian output should be ample to make up for any production shortfalls from Columbia this season, as the second leading South American producer suffered its second consecutive production shortfall due to heavy rains. Many traders will also keep an eye on events in Europe, as any set-back in dealing with the European debt crisis could spark a further sell-off in commodities, with the Coffee market being particularly vulnerable should global supplies rebound this coming season.

Technical Notes

Looking at the daily chart for March Coffee, we notice prices have been rangebound during the past several weeks, with the market currently trading near the low end of the recent price range. Bears seem to have the upper-hand, as prices are below both the 20 and 200-day moving averages and momentum as measured by the 14-day RSI has started to weaken, with a current reading of 43.19. Major support for March Coffee is found at the recent low made back on December 19th at 212.35, with resistance found at the January 12th high of 238.50.


Mike Zarembski, Senior Commodity Analyst

Support / Resistance & Oscillators
	S2	S1	Pivot	R1	R2
Mar Coffee Pivot	214.85	216.10	218.15	219.40	221.45
Mar Coffee Chart		212.35		238.50

Today's Highlights and Economic Data
Economic Report	8:30 AM ET: Personal Income 11:00 AM ET: Export Inspections
FND / LTD	None

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