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The strong US dollar and deterioration of the world economy combined with the fact that many countries with big coffee production also have seen a collapse in their currency values has been one of the key factors to spark a larger than expected movement of coffee on to the world market. This factor combined with a deflationary world economy may have disguised the real global supply and demand fundamentals for coffee. Demand is probably better than believed as the end user pipeline contracts and supply may not be as available as the short-term flow of coffee suggests. The coffee market bounced early in the session yesterday but did not see much follow-through to the upside as weakness in the stock market and a firm US dollar helped revive fears that recessionary demand will hurt nearly all commodity markets. The deflationary trend leaves holders of coffee stocks, especially from areas which are seeing currency depreciation, to be motivated sellers of inventory while buyers have taken a more hand-to-mouth approach to needs. This is likely to empty the end user pipeline for coffee and could eventually lead to some tightness. As the pipelines empty, however, there is a perceived drop in demand. There were 2 more deliveries against the March contract bringing the total to date to 3,049 contracts. Mexico is launching a 5-year program to help producers plant millions of new trees and replace aging trees in an attempt to expand production and exports. This is a negative force longer-term but could help reduce production some in the next few years. ICE certified Arabica stocks were down 3,668 bags to 4.157 million bags with 13,216 bags pending review.
TODAY’S GUIDANCE: Resistance for May coffee comes in at 109.10 and 110.20 with 105.00 and 101.60 as next support levels.
