Long July Coffee At Bargain Basement Prices
Updated
Coffee price have fallen into bargain basement levels following recent EU lock-downs. However, Brazilian supply dynamics remain bullish, the Brazilian currency just broke its 6-session losing streak, and the EU will eventually be open for business. So when things seem to be at their worse, now is the time to buy. Best option: buy vertical call spreads. I like July options long 125 call, short 140 call.
Note
Coffee prices have been able to maintain upside momentum for most of April so far and as expected. Prices have recovered more than half of their Feb/Apr drawdown, achieving the first target price. The supply outlook is bullish and providing underlying support. There are two key drivers: (1) Fresh signs that near-term demand is improving as enter the post-Covid period and that should fuel a retest of the late February highs; and (2) The prospects of significantly lower Brazilian production (down 30%) during the 2021/22 season. In addition, a moderate rebound in the Brazilian currency has provided additional strength to coffee prices as it eases pressure on Brazil's producers to market their remaining 2020/21 coffee supplies. Near-term support for July coffee is at 132.35 and 131.20 with resistance at 134.65 and 138.50.
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