Last month’s arti­cle indi­cated that there were some warn­ing signs that the bull mar­ket may see its demise sooner than longs would care to admit and that these indi­ca­tors should be respected; cau­tion was advised.  The cof­fee mar­ket has since pulled back more than 30 cents a pound or a 10% cor­rec­tion.  How does one dis­tin­guish between when a cor­rec­tion is just a pause in the long­stand­ing bull run and the mar­ket will even­tu­ally turn back up and rally into new high ter­ri­tory or when the pull back is really the begin­ning of the end and the mar­ket is in for a long slip­pery slope down­ward?   For cof­fee, the jury is still out and until the frost sea­son is over and the Brazilian 2012–13 crop has blos­somed, it will be impos­si­ble to say for sure that the bull mar­ket has finally come to a deci­sive end after more than five years of higher highs and higher lows.   Market cor­rec­tions can some­times be steep, depend­ing on the tim­ing of the move, influ­ence of out­side mar­kets, and how tech­ni­cally over­bought the mar­ket had become on advance, which is usu­ally indi­cated by the net spec­u­la­tive long posi­tion and its liquidation.

For cof­fee, the spot short­ages that drove the mar­ket suc­ces­sively higher have been tem­porar­ily alle­vi­ated. The mar­ket is headed into what is nor­mally a sea­son­ally weak period with influx of cof­fee from the Brazilian har­vest even though the weather in Brazil has poten­tial to be men­ac­ing.  The mar­ket gen­er­ally makes a sea­sonal low in late July or August.  There is still a risk though for the sit­u­a­tion to become tighter again as the sea­son drags on due to a smaller Colombian sec­ondary har­vest and many pro­duc­ers hav­ing already sold much of their crops to take advan­tage of the higher prices. Coffee started to flow to the NY Board as cash mar­ket dif­fer­en­tials weak­ened, but this may not per­sist for too long with signs already that on the price drop, pre­mi­ums have started to firm back up. Producer stocks are lim­ited and while con­sumer stocks have edged upwards of late, would be insuf­fi­cient to cover yet another pro­duc­tion short­fall. Therein lies the key to the mar­ket: it would take another sup­ply shock to turn the momen­tum back up.  Worries about future short­ages are already built into cur­rent mar­ket lev­els. Bull mar­kets need to be con­tin­u­ally fed fresh news to sus­tain the rise and of late there sim­ply haven’t been enough new devel­op­ments to keep the rally in force.