Coffee grinding higher

A FRESH release of bad news has hit the coffee market, propelling prices to a 7-year high.

The bearish outlook for coffee started earlier this year with extreme weather hitting Brazil, the world's largest coffee producer. In June, the country faced its worst drought in almost a century that impaired its agricultural infrastructure and in the following months, frost conditions also damaged coffee supplies for the next few harvests.

Colombia, another leading coffee producer, was also not spared from the bad weather as excessive rain affected its coffee production yield due to the increased risk of plant diseases.

Apart from the unforgiving weather, inflation and supply chain issues also contributed to the global coffee supply woes. Rising costs have hit coffee farmers on various fronts, including fertilisers, labour and fuel.

The ongoing disruption in global supply chains has also caused logistical costs to remain elevated, eating into margins of coffee buyers.

Furthermore, shipments are also taking more than twice as long, challenging coffee buyers to adjust their schedules in order to cope with this vital hit.

The series of unfortunate events is pushing the market to its limit, with news of some producers defaulting on their contracts, causing additional strain to their counterparts' operations.

Technical outlook

The worsening fundamentals in the global coffee situation are evident in the futures market. ICE Coffee C futures, the global benchmark for Arabica coffee, is seen to be on an uptrend since the start of the year as market participants priced in various waves of bad news and deteriorating fundamental outlook.

Taking reference from the rolling second contract month of ICE Coffee C futures, the contract broke past its last resistance area of 217.85-218.00 US cents/pound (high of Jul 26, 2021 and Oct 12, 2021) in the week of Nov 8, 2021 and is seen to continue surging higher to a level that was last seen in October 2014.

While the uptrend is foreseen to remain intact for the mid to long term, the contract may see a pullback in the short term due to overbought conditions as suggested by its 14-day RSI (relative strength index) reading reaching 70.

If this situation plays out, support is expected to come in at 218.00 US cents/pound (high of Oct 12, 2021) as well as the 50-day simple moving average.

• The writer is commodities manager, Phillip Futures

Disclaimer: Chartpoint is provided by Phillip Securities Research for information only, and should not be construed as investment advice.

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