The cof­fee mar­ket had accel­er­ated to the upside and punched through $3.00 per pound for the first time since May 1997 but has since backed off the recent highs. As much as the fun­da­men­tals hold promise to become even tighter in 2011-12, the off year for the Brazilian crop, at some point it becomes time to rec­og­nize that all the bull­ish fun­da­men­tals are already reflected in the price and look beyond to what will hap­pen next. Bull mar­kets gen­er­ally die fast and usu­ally sooner than many care to rec­og­nize. One need only look at the other soft com­modi­ties (sugar, cot­ton, and cocoa) to see how quickly mar­kets can turn and go from rag­ing bull to bear­ish in a flash.

There are some sea­sonal fac­tors that sug­gest the bull’s life expectancy is run­ning short as well as some other tell­tale sig­nals. The trou­ble is that that the Brazilian win­ter is just ahead, where there is always a risk that the world’s largest sup­plier may have a cold front push north from Argentina and cause frost dam­age to the more southerly cof­fee regions of Brazil. The last severe frost was in 1994. The ear­li­est recorded frost was on May 30^th, back in 1979. The like­li­hood of a frost is rather slim. Much of the tra­di­tional cold pock­ets in Parana State no longer even grow cof­fee. Immediately fol­low­ing the Brazilian win­ter is when the mar­ket will watch for timely rains that will pro­mote the blos­som­ing of the 2012–13 crop. While the upcom­ing har­vest is the off year and will not be suf­fi­cient to meet domes­tic needs as well as inter­na­tional demand for Brazilian cof­fee, the fol­low­ing crop could be a “mon­ster” and the mar­ket will be faced with the poten­tial threat of turn­ing from one of short­age to sur­plus.  This could take some of the steam out of the bull market.

As the mar­ket has risen it has become more dif­fi­cult for pro­duc­ers to actu­ally sell their cof­fee because the trade is reluc­tant to take on new com­mit­ments with the pos­si­bil­ity of explo­sive action and the bur­den this would place on their finances to meet mar­gin calls on the short hedged posi­tion. Roasters are reluc­tant to add cov­er­age at these higher lev­els and that is mak­ing trad­ing con­di­tions thin­ner and poten­tially more volatile. In most bull mar­kets, a sig­nal that the end is near, is when the open inter­est or the num­ber of out­stand­ing posi­tions starts to drop but prices rise on short cov­er­ing, usu­ally panic type buy­ing. Most explo­sive bull mar­kets have very lit­tle to do with spec­u­la­tors run­ning amuck and cre­at­ing the wild trad­ing behav­ior that dri­ves prices sharply higher.

There are other sig­nals to watch as well for signs the bull move may be end­ing. Certified stocks had been fiercely drop­ping when sup­plies were tight and roast­ers were forced to turn to the cof­fee that has been graded for deliv­ery against the New York “C” con­tract, but of late, there has been a steady influx of cof­fee being graded and cer­ti­fied.  It shows that for right now, the spot mar­ket demand is being sat­is­fied and the Board is per­haps becom­ing an attrac­tive buyer of cof­fee once again, because it is becom­ing dif­fi­cult to place the cof­fee else­where. The tight­ness could eas­ily reassert itself though if the Brazilian har­vest is dis­ap­point­ing or Colombia con­tin­ues to have weather related dif­fi­cul­ties.
USA Coffee Stocks Starting to Creep Up Again