Coffee Market Sets Up For Call Option Sellers (Video)

Includes: CAFE, JO
by: James Cordier

James Cordier of provides this market update for March 28, 2016. Below is a transcript of this video:

Good afternoon. This is James Cordier of, with a market update for March 28th. I thought we'd do something slightly different today. We're going to talk about history, and then we're going to talk about doing some very good option selling in 2016. Several years ago, many of you may remember Rita and Katrina slamming into the Gulf of Mexico and ripping out natural gas and crude oil platforms. At the time, natural gas prices started to soar and people thinking "How are we ever going to find any natural gas? How are we ever going to get any more crude oil?" Prices spike. They go up some 40, 50, 60 percent basically overnight, and investors scramble to cover their shorts and go long commodities like natural gas. The entire time people are thinking "Well, natural gas will never come back down to the original price, certainly because of all the supply that has now come off of line. Two years later, of course, natural gas is trading below the price prior to the storms that hit, and now, in 2016, natural gas is trading at $1 per million BTUs, roughly one-quarter of what the price was prior to the storms. History tells us a lot that supply and demand will change, based on prices and based on consumer consumption. What we're looking at right now is we're looking at coffee. Coffee market, several years ago, changed drastically, as Brazil at the time with the number one producer in the world received a freeze in southern portions of the growing regions. Coffee prices soar, one-third of the coffee crop is demolished from the cold temperatures, and everyone scrambles to buy coffee and expecting it to never go back down to the original level. One year later, coffee prices are trading below the pre-freeze price, and once again, supply is irredundant. This year, 2016, coffee prices start rallying because of dry conditions. In some of the northern Robusta regions of Brazil, at the same time we have something called the mealybug, which is eating some of the coffee cherries, as well. Coffee prices start rallying from 115 up to 135, investors scramble to buy coffee and, low and behold, everyone's worried about the weather again this year. 2016, Brazil is going to produce approximately 56 to 57 million bags, the largest crop ever in history, and we feel that October, November, and December of this year, prices will once again be below the price that originally took place when the mealybug was announced and when dry conditions happened. With coffee now rallying, approximately 135 to 140 per pound, we're looking at call selling opportunities going forward. We're looking at the December contract, we're looking at 220, 230, and 240 dollars per pound strike prices, roughly double the price of coffee. Coffee usually has its largest demand in the winter season; January, February, and March. A lot of consumers of coffee in the United States feel that they drink coffee daily year round, but actually we consume about 20% more coffee during the winter season, and then people go to summer drinks as it starts to warm in April and May. During April and May is when Brazil starts harvesting their crop, and this year is expected to be a record. April and May is the time to be short coffee. We're going to start doing that this coming week, and we expect coffee prices to be far below current levels where they are right now. Selling 220 and 230 coffee calls is going to look like a very good investment, I think, this fall. We expect coffee prices to be roughly half of what the strike prices are. This is how you trade history, this is how you trade commodity options, and this is an opportunity to sell coffee calls in 2016. We expect this to be a great opportunity, and low hanging fruit, as we like to say.

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