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Coffee futures are probing for a near-term low and it may not take much of a supply shock to turn the trend up. For now, deflationary pressures persist but hedge funds are already pressing the short side in coffee and coffee may be one of the few commodity markets which does not see a significant decline in usage during recessionary periods. March coffee closed moderately lower on the session for the second day in a row yesterday as global economic concerns and ideas that near-term supply is high helped pressure. The advancing Vietnam harvest is making more coffee available on the world market now and sellers seem motivated due to the deflationary environment and the strong US dollar. In addition, buyers are on the sidelines and weakness in the energy markets is seen as helping to confirm to many traders the negative demand tone.

The heavy rains of November in Vietnam sparked some early flowering for the 2009/2010 crop which could cause a decline in production next year and some quality issues with the current crop. Once the deflationary pricing pressures on the economy begin to subside, the coffee market appears to have the supply fundamentals to see higher prices in 2009. For now, however, buyers are still going hand-to-mouth and the market is still absorbing a large crop from Brazil this past year and a near record ongoing Vietnam harvest. Once these pressures ease and the focus sifts to the 2009/2010 season, the market may be in a position to trend higher. Brazil weather looks favorable to the development of the 2009 crop which traders believe will be down to near 40 million bags from near 50 million this year. A combination of the lower Vietnam crop and the reduced Brazil crop could result in a significant world production deficit and tightening world supply. This opens the door for a significant rally in 2009.

The Commitments-of-Traders report showed trend-following funds net short 13,704 contracts which leaves the market vulnerable to significant short-covering “once” there is a technical sign of a low or once resistance levels are violated. For the first two months of the new season, Guatemala exports have reached 157,011 bags, down 21% from last year’s pace. ICE certified deliverable stocks fell by 63,566 bags to 4.436 million bags, with 9,360 bags pending review. Stocks have been falling recently and this may indicate a lack of new coffee in the pipeline and may eventually be seen as a supportive force.

This content originated from – The Hightower Report.
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