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Given weakness in outside market forces and a fairly hefty speculative net long position, the coffee market is likely to see further downside potential over the near-term. September coffee closed moderately lower on the session on Friday and to the lowest close since mid-May. A lack of threatening weather in Brazil and ideas that the supply on the world market will gradually build in the second half of the year helped to pressure. The USDA on Friday pegged world coffee production for the 2009/2010 season at 127.4 million bags, down 7.3 million (5%) from this past year. Brazil production is in the off year of their cycle and is expected to be down 8 million bags to 43.5 million. Vietnam production is expected to fall 1.3 million bags to 18.4 million. India production is expected to be higher and Colombia is expected to see production increase by 1.7 million bags to 12.2 million. Outside markets have helped provide underlying support to the market in recent weeks and clear negative tone from outside markets on Friday and again today help to add to the bearish tone. A sharp rally in the dollar and weakness in metals and energy markets helped pressure overnight and helped spark additional long liquidation selling late last week. Costa Rica is expected to produce 1.725 million bags for the 2009/10 season, up 6.1%. The Commitment-of-Traders reports on Friday showed a slight long liquidation trend from speculators. Trend-following funds reduced their net long position by 2,634 contracts to 29,389 contracts. Index funds were also sellers reducing their net long position by 455 contracts to 35,439 contracts. The selling trend from funds is considered a bearish short-term force. US exchange stocks were down 7,490 bags to 3.676 million with 36,595 bags pending review.
TODAY’S GUIDANCE: The market looks set for further long liquidation selling from speculators with a warmer and drier forecast in Brazil into the end of the week.
TODAY’S MARKET IDEAS: Close-in resistance comes in at 131.10 for September coffee with 126.90 and 122.70 as key support levels and targets on the downside.
