Falling Output Sends Coffee Steaming Higher – Time To Go Long

Coffee prices are on the rise on Wednesday, extending the rally to the fourth day in a row as the global production deficit is worsening. Rabobank upgraded its estimates for worldwide coffee shortfall by 300,000 bags to 2.5 million bags for 2016-17, and by 200,000 bags to 1.0 million bags for 2015-16.

Vietnam, the world’s top robusta producer, exported 139,800 tonnes (2.33 million bags) of coffee in July, down 11.8 percent from the previous month. Trade was slower compared to the period from October 2015 to July 2016, which witnessed a jump by about a third to 1.46 million tonnes (24.34 million bags), as stocks declined. Vietnam’s 2016/17 crop is expected to continue the slump due to the impact of a drought earlier this year and also because growers have switched to growing pepper.

According to local sources, Vietnam’s 2016/17 output could drop by around 10 percent compared to the output in the ongoing season to nearly 1.5 million tonnes (25 million bags). Median estimates from Reuters, forecast the output at 26.5 million bags, compared with 27.5 million bags in 2015/16.

Meanwhile, the roya fungus, also known as coffee leaf rust, and the ageing of coffee plants is damaging Mexico’s production to less than half of the 6.2 million bag peak output recorded in the 1999-2000 period. Mexico is experiencing its fourth consecutive season of declining output with only 2.8 million bags produced during the 2015-2016 season, down 22% from the 3.6 million bags produced in 2014-2015, the International Coffee Organization (ICO) said.

Labor shortages for the September harvest are an unresolved problem for Colombia’s coffee industry, in addition to other unpleasant factors such as drought, and upcoming torrential rains and roya leaf rust, which is usually brought by the La Nina phenomenon, which may begin this month. Colombia has already experienced the damage from La Nina and roya previously – in year 2012. These two factors devastated the country’s harvest and sent annual output down to a multi-decade low of 7.7 million bags at the time.

Elsewhere, drought in some coffee producing nations such as Brazil and India are also contributing to a depressed global output, especially robusta coffee, which needs a lot of water. India’s robusta production may drop by at least 25-30 per cent while high temperatures during the crucial flowering stage and lack of timely rains are threatening arabica along with the outbreak of white stem borrower disease, according to market sources.

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Fig: COFFEE D1 technical chart

Coffee has been raging higher from the two-month low at 134.70 recorded recently. The commodity continuously broke above the 38.2% and 23.6% retracement levels and is heading higher to a one-and-a-half-year high at 154.55. Coffee prices have strongly crossed through both the MA’s – the 20 day and the 50 day MA’s from below. Further confirmation that prices have already entered a bullish phase is indicated with the RSI ticking up to 60.7879.

Trade suggestion

Buy Stop at 145.50, take profit at 147.70, Stop loss at 144.10

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