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Executive summary:

  • Coffee (JO) (CAFE) traders remain net short.

  • The Brazilian drought comes to a close with 7 days of rain coming to coffee, sugar, and soybean growing regions in the south of Brazil starting Saturday the 22nd.

  • Sugar (SGG) (CANE) (SGAR) and Soybeans (SOYB) both made technical breakouts but will be under pressure as the Brazilian drought subsides.

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February 20th CFTC Data

The latest data from the CFTC (Commodity Futures Trading Commission) show that coffee traders, while reducing short positions to early February levels, remain net short the commodity. The two graphs I created below using CFTC data demonstrate the above statement (contracts of 37,500 pounds).

The above data from the CFTC show that the potential of a short squeeze in coffee remains possible, yet, unlikely due to the end of the Brazilian drought.

End of the Brazilian Drought

As I stated in my initial bullish case for coffee (Coffee Is Just Starting To Heat Up), the Brazilian drought has been the root cause of coffee's move higher. Then, I updated my thesis after prices rallied 20% (Corn Will Not Be The Next Coffee) to be neutral on coffee prices. Right now, I am slightly bearish on coffee prices. The sole reason that I am not a complete bear is that some short covering could take place as traders remain net short. Currently, the Brazilian drought is subsiding and the return of rain to the coffee growing regions will ease supply crunch fears. The map below highlights the southern coffee growing regions of Brazil, the world's largest coffee supplier.

Below are rain forecasts for the regions where coffee is grown. The forecasts are from this past Friday through Tuesday (I inserted the red circles).

After Tuesday, rain can be expected on Thursday, Friday, and Saturday in Sao Paulo, a major coffee growing region in the south of the country. The impending precipitation should also temper fears of a supply crunch in soybeans and sugar.

Technical Breakout in Soybeans

On the daily soybeans chart from stockcharts.com, multiple indicators are quickly turning bullish. Firstly, the move higher on the RSI (relative strength index) since the beginning of February indicates that soybeans have momentum that was absent for several months. The only concern with the move over 70 on the RSI is that soybeans are now overvalued. Secondly, the moves above the 50-day moving average and 200-day moving average highlight a new strength in soybeans. The Parabolic SAR (a momentum indicator), has also lined up nicely below the candlesticks. Another momentum indicator, the MACD (below chart), made a bullish cross at the beginning of February. Lastly, the CMF (Chaikin Money Flow, Bottom) has been moving to the upside since Christmas suggesting a sustained accumulation of soybeans.

The soybeans chart, while bullish, may not have much more upside. The graph below, using data from the CFTC, shows the positions of traders on soybeans (contracts of 5000 bushels).

The above graph suggests that traders have become increasingly long soybeans and that a coffee-like short squeeze will not happen. Furthermore, the graph shows that traders do not believe in a drought induced supply crunch as net long positions increased by a meager 427 contracts since news of the Brazilian drought broke.

Unlike coffee, the United States is the largest producer of soybeans with 38% of global output. In the United States, the soybean harvest ended in November but the Brazilian harvest has just begun. Brazil accounts for 25% of global production and is a major player on the supply side as it is the only major producer of soybeans currently harvesting. The map below shows where soybeans are grown in Brazil.

As is the case with coffee, the subsiding Brazilian drought will put pressure on soybean prices to the downside. The major areas of soybean production in the south of Brazil are the same areas where coffee is grown. The incoming showers will provide relief to crops and quell fears of a supply crunch.

Technical Breakout in Sugar

On the daily sugar chart from stockcharts.com, most technical indicators have turned bullish. Firstly, the move to the upside on the RSI (relative strength index) since late January indicates that sugar has momentum that was absent for a few months. Secondly, the move above the 50-day moving average was a bullish signal. One major concern is that sugar prices, if they continue to move higher, will bump into the 200-day moving average at 58.06. The Parabolic SAR (a momentum indicator), has also lined up nicely below the candlesticks. Another momentum indicator, the MACD (below chart), made a bullish crossover at the end of January. Lastly, the CMF (Chaikin Money Flow, Bottom) very recently turned to net inflows of capital suggesting a near-term move higher in sugar.

The sugar chart may even have more upside. The graph below, using data from the CFTC, shows the positions of traders on sugar (contracts of 112,000 pounds).

The above graph suggests that traders have rapidly become short sugar and while a coffee-like short squeeze will not happen, a short squeeze could happen. However, a short squeeze in sugar is unlikely due to the end of the Brazilian drought.

Like coffee, Brazil is the largest producer of sugar with 21.2% of global output. The map below shows where sugarcane is grown in Brazil.

As is the case with coffee and soybeans, the end of the Brazilian drought will put pressure on sugar prices to the downside. The major areas of soybean production in the south of Brazil are the same areas where coffee and soybeans are grown. The rain set to fall in the next few days will provide relief to crops and lower fears of a supply crunch.

Conclusion

While coffee was a remarkable trade, I do not advise investors to buy sugar or soybeans in hopes of a coffee-like explosion to the upside as the Brazilian drought is ending. That being said, sugar and soybeans should not be shorted as their charts remain in excellent condition. In the meantime, coffee is also a "no-touch" trade as traders remain net short. That being said, when the time to short coffee comes, I will be sure to let investors know.

Source: The Brazilian Drought Is Over