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Weak technical action and a continued sharp drop in open interest has quickly driven coffee prices back down to the lower end of the 5-month trading range. The market lacks new buying interest from end users which should seasonally begin to pick-up soon and a lack of a supply threat from Brazil has added to the short-term bearish concerns for the market. While the market is probing for support and a near-term low, there is still no sign of a low and buyers seem patient. We are moving past the period of largest supply as the Brazil harvest is winding down. Too much rain in the past week or so in some of the key producing areas of Brazil may cause an early flowering for next years crop which would not be a good start to the 2010/11 season. Ideally, the region stays dry until September and hefty rains all at once spark a major flowering. However, some years there are two or three flowerings spread out over a few months which tends to cause lower yield for the coming crop. In this case, the moisture could also be seen as a quality issue for the old crop season for the coffee which has not been harvested. December coffee closed sharply lower on the session yesterday and pushed to the lowest level since July 22nd. The market saw an early bounce but there was a lack of new buying interest and a firm US dollar helped pressure. Open interest continues to fall significantly and traders believe we are seeing a steady flow of long liquidation selling and a lack of new buying interest as a reason for the decline. In addition, producer selling has slowed. Open interest is down to the lowest level in 3 1/2 years to 95,047 contracts which is down from near 145,000 in early June. Traders see the Vietnam 2009/10 production down near 6-7% from last year as compared with the government forecast of a 20% drop. ICE certified deliverable coffee stocks were up 1,813 bags to 3.445 million with 35,865 bags pending review.
TODAY’S GUIDANCE: The market is probing for a near-term low but it may take more of a supply threat than an early flowering to help support a low. The next chart support is at 121.15 and then 118.05 with resistance at 125.10 and 126.20.
