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April 29, 2015, 10:32 a.m. EDT

Put down that cup, it's time to short coffee

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About James Cordier

James Cordier is founder and head portfolio manager of OptionSellers.com, where he has managed assets for a global client base since 1999. He is regularly quoted by national financial media including the Wall Street Journal, Barrons, Forbes, CNN Money and Dow Jones Newswires. He is a regular guest analyst on CNBC, Bloomberg Television and Fox Business News. In 2014, James launched his 3rd edition of The Complete Guide To Option Selling, published by McGraw-Hill. For more information, visit OptionSellers.com.

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By James Cordier


Bloomberg

The year 2014 was a banner year for coffee prices, as the market rallied off of Brazilian crop concerns right up through the critical "flowering" season in October. But as timely rains finally arrived (just in time — as they usually do in Brazil) the market was forced to backtrack as projected crop damage ended up being much exaggerated. We wrote a column here at MarketWatch in October of 2014 advising the possibility of this happening, which I recommend reading if you'd like some back story on this market.

This steady trend lower in prices made coffee an ideal market for short sellers for the past six months. The question becomes, is it still ideal for short sellers?

In our opinion, the answer to that question remains yes.

September 2015 Coffee


FactSet

For as coffee has shown technical signs of bottoming on the chart, fundamentals in the coffee market do not seem to support substantially higher prices anytime soon. To support this view, we present three key fundamentals that will affect coffee values for the next three to five months.

Brazil outlook

Bulls looking for a return to coffee's 2014 glory days will be disappointed this year. Despite the Brazilian drought, the country will begin harvest this month of what is expected to be a 45-million-bag crop — certainly not a record, but substantially higher than some had expected at the height of the weather scare.

In addition, a rainy summer in Brazil (December-March is summer in Brazil) has left coffee trees fully recovered from the 2014 drought.

Wolthers Douque USA, a Florida-based green coffee importer, reports Brazilian coffee trees "quite lush and strong" and "rejuvenated and ready to flower next October."

Assuming Brazil returns to more normal weather patterns this year, the country could produce over 50 million bags of coffee for next year's crop.

Global outlook

As in most agricultural commodities, the two key fundamental figures one should analyze when forecasting prices are ending stocks and stocks-to-usage ratio (see chapter 14, The Complete Guide to Option Selling, 3rd Edition ).

Despite 2014's Brazilian crop reductions, global ending stocks for 2015 are projected to remain at historically healthy levels.

At just over 35 million bags, 2015 projected global ending stocks would be similar to 2013 and 2007.

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