Coffee Prices Drop Sharply as Market Support Fails
Coffee prices dropped sharply at the start of trading Thursday after the market broke below price levels that had held up for months, a technical signal to traders that coffee, which was already in a bear market, is on the way to plumbing new depths.
Arabica coffee futures for front-month September delivery were down 1.7% at $1.2290 a pound on the ICE Futures U.S. exchange, after falling as much as 2.9% early in the session. The market drifted down at the start of trading, but then fell sharply after prices fell through Wednesday's settlement level at $1.2505. Coffee had fallen in six straight sessions through Wednesday. Small markets like the $4.5 billion one for coffee futures often trade on an investment approach that uses chart- based technical indicators to guide prices, when news about real-world supply-and-demand fundamentals are infrequent. In coffee's case, brokers and traders say the moves have been technically driven -- and that the next support levels for it are far below the market's current price.
"We're in a bear market, it's been falling for months," said Adam Sarhan, chief executive of investment firm Sarhan Capital in New York. "You have a lot of supply and not a lot of demand." The bout of selling may have at first been prompted by the weather outlook in Brazil, the world's largest producer of Arabica coffee beans. The country is amid the start of the mid-year harvest season, and after a bout of rains in the coming days, dry conditions are expected that should aid crop picking. Meteorlogix said there would be "mostly favorable conditions for the coffee harvest." Another factor was a downdraft in the value of Brazil's currency, the real, in the wake of a spate of disappointing economic and fiscal news from the country, including an uptick in unemployment and plans to reduce its budget surplus target that could impact its credit rating. Because of Brazil's dominance in the coffee market, prices are heavily influenced by the real, which was down 1.8% against the dollar Thursday.
If it occurs, a Brazil crop of more than 50 million bags is expected to put more pressure on prices. "Market forces continued to have a mostly negative tone," research consultancy Hightower Report said in a note. Meanwhile, cotton futures gained after weekly data from the U.S. Department of Agriculture said net export sales of upland cotton were 91,500 running bales in the week ended July 16, up 79% over week-ago levels and 64% over the recent four-week average, led by large purchase increases from Vietnam, South Korea and Turkey. Cotton, one of the few commodities across the raw materials complex to post gains this year, was in the red but jumped more than 1% after the release of the data, most recently trading at 64.88 cents a pound.
In other markets, sugar futures climbed 0.6% to 11.45 cents a pound as traders awaited a report on Brazil's sugar production, while cocoa prices fell 0.8% to $3,252 a ton as traders braced for disappointing Asian demand data to be released Friday. Frozen concentrated orange juice futures were down 0.9% at $1.228 a pound.
-- Write to Christian Berthelsen at christian.berthelsen@wsj.com
