Is Coffee Ready for a Jolt?

By Brad Zigler

Is it time to actually buy something now? Monday, the market seemed to vote resoundingly "Yes!" It's not every day you see a 900-plus point upsurge in the Dow. Come to think of it, you've NEVER seen that kind of move before. Of course, Monday's action didn't take back all that was lost the preceding week. Even if it did, the ills that brought down the market haven't yet been cured.

Which is why some would prescribe a dose of caffeinated commodities for a portfolio pick-me-up now. Coffee, in particular, seems to have formed a base in the past week. That, understandably, might have gone unnoticed.

Coffee closed higher on Monday, mainly due to short covering. Technical factors were turning bullish, suggesting that bottoming may be at hand. For the March contract, the deck seems to be the $1.20-a-pound level. For watchers of exchange-traded notes, the analogue is the $37.40 level for the iPath Dow Jones-AIG Coffee ETN (NYSE: JO).

So, what's going on with coffee? Well, first off, this year's crop was less than, um, stimulating. At least it wasn't productive enough to build inventories likely to satisfy next year's demand. The recent downtrend has brought coffee prices below the cost of production. That, and the credit freeze, will keep farmers in a belt-tightening mode. Unable to afford fertilizer, pesticides or additional labor, producers may deliver even less coffee next year.

Here's the kicker, though: Commercials in the futures market have flipped from a net-short to a net-long position for the first time this year. Commercials - who include buyers such as Starbucks and producers - think coffee is cheap now, but unlikely to stay cheap in the future. Hence the large upswell in buying hedges.

That's about as bullish as it gets. Which is why, I suppose, some pundits are calling for a doubling of coffee prices by next summer.

By then, of course, we'll all be drinking iced tea.

ICE/NYBOT Coffee (March ‘09)