Buy Coffee

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The financial media has been focusing on the financial storm brewing on Wall Street, but today I’m here to tell you about an upcoming storm of a different sort. You see, the weather can have a palpable impact on financial markets, and right now it looks poised to send one of my favorite soft commodities soaring.

I think the coffee price is heading higher.

Right on cue, the announcement last week of higher storm estimates for the 2010 hurricane season has started to impact commodities. The National Oceanic and Atmospheric Administration, is predicting an above-average year of tropical storms for the Atlantic basin.

According to USAToday:

The agency’s forecast for 2010, released today, calls for 14 to 23 named storms in the Atlantic Ocean, Caribbean Sea and Gulf of Mexico.

Of those named storms, 8 to 14 should become hurricanes, including 3 to 7 “major” hurricanes, with wind speeds above 111 mph, the agency says.

Tropical storms are given a name when wind speeds reach 39 mph, and are upgraded to hurricane status when sustained winds reach 74 mph. An average Atlantic hurricane season sees 11 named storms, including six hurricanes, with two becoming major hurricanes.

If this outlook holds true, this season could be one of the more active on record,” NOAA chief Jane Lubchenco said today at a press conference.

Some of the markets most affected by hurricanes are surely the soft commodities – coffee, sugar, and cocoa – which I want to discuss now.

Storms are a big deal for commodities because they impact the supply and demand equilibrium that would otherwise take place in the market. If a major storm system severely restricts coffee production, for instance, supply gets choked off, and prices rise as a result. That’s a very good thing for commodities investors who place bets expecting prices to rise during storm season…

Right now, I think that one particular soft commodity – coffee – could be best poised to profit.

Coffee Price

Coffee looks ready to test the $1.38 level for the third time since April. A strong triple bottom with prices holding $1.30 January, March and now April/May is very encouraging for bullish rallies.

Here’s more from Bloomberg:

Coffee futures climbed the most in four weeks after a tropical storm slammed Guatemala, Central America’s largest producer. Cocoa also gained.

Landslides and flooding killed at least 82 people and left 53 missing, David de Leon, a spokesman for Guatemalas national disaster agency, said yesterday. Downed bridges and landslides cut off access for some coffee growers in western Guatemala, said Lucrecia Rodriguez, a deputy manager at Anacafe, an industry trade group.

People are concerned about the conditions in Guatemala, said Tom Mikulski, a senior market strategist at Lind-Waldock, a broker in Chicago.

When it comes to staking out your own coffee position, time is of the essence…

Needless to say, I’ve already briefed my Resource Trader Alert readers on the coffee spread play that I think is best positioned to profit as the spot price continues to climb. Our coffee spread position looks especially attractive right now since the higher strike options have little chance of any return.

But if you’re willing to accept a less super-charged path to coffee profits, you can get decent exposure to coffee through an exchange traded note, the Barclays Capital iPath Coffee ETN (NYSE: JO). JO is a pure play on coffee; that’s the good news. The bad news is that JO is not an actively traded security. With a market capitalization of only $12 million, JO rarely trades more than 10,000 shares a day.

The summer weather promises to be a bit wilder than usual. So keep your eyes on the “softs”…especially coffee…and look for opportunities to profit.

Alan Knuckman
for The Daily Reckoning Australia

Alan Knuckman
Commodity expert Alan Knuckman hails from the home of commodity trading in Chicago, where he began as a clerk on the floor of the Chicago Board of Trade (CBOT). Alan's worked in the commodity markets for 18 years - and is devoted to raking in profits for his readers.
Alan Knuckman

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5 Comments on "Buy Coffee"

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Jim A
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But do you recommend buying ‘paper’ coffee, or taking delivery of the physical product ?… (If the world really does go-to-hell-in-a-handcart, then I’ll be glad to have stocks of the *real* stuff… along with stocks of real tobacco, alcohol, pasta and *of course* metals !)

Lachlan
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Coffee CFDs I’m watching just put in 140pips spike after travelling flat in a 30 pip range for 3weeks. Make paper and convert to hard Jim.

Lachlan
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Although I’m not suggesting anyone should get long coffee..just an observation that Alans off to a profitable start. Im hanging off a little yet.

wasabu
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I’ll have mine ‘short’ thanks :)

Lachlan
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Add another 80 pips.

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