Supply pinch tilts risk higher for coffee

While an economic downturn may negatively impact demand for the more expensive bean, compared with Robusta, key fundamentals paint an overriding bullish picture for Arabica. The futures curve is currently pricing in the highest level of tightness since 2010 with the one-year backwardation, or roll yield achieved by holding a long position for one year, having risen despite recent attempts to sell it down. In addition, stock levels at warehouses monitored by the ICE futures exchange has declined to a 23-year low while speculators have cut their net long by 70% since February. 

All developments that may underpin the price over the coming months, but first as per the chart below the price action needs to become more assertive. The first month contract has been trading within a wide declining channel since February, however, after finding support at $1.96/lb the important 38.2% retracement of the 2020 to 2022 rally, the potential for a test of the upper falling trendline, currently at $2.30/lb has risen. First though it needs to break above the 50-day moving average, currently at $2.21/lb. If rejected the medium term downtrend would likely resume with focus on a downward extension towards $1.75/lb.

Robusta, the cheaper coffee variety traded in dollars per metric tons may potentially show the way. After also finding support at the 38.2% retracement of the 2020 to 2022 rally it has done better than Arabica by breaking higher through its falling wedge like pattern. A daily close above $2160/tons is needed for confirmation of a bullish reversal that could send prices higher towards the previous peak around $2450/tons.