Coffee's Bear Market Could Plunge to New Depths

Markets Dow Jones Newswires

Coffee prices dropped sharply at the start of trading Thursday after the market broke below price levels that had held up for months, a technical signal to traders that coffee, which was already in a bear market, is on the way to plumbing new depths.

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Arabica coffee futures for front-month September delivery were down 2.6% at $1.2190 a pound on the ICE Futures U.S. exchange. The market drifted down at the start of trading, but then fell sharply after prices fell through Wednesday's settlement level at $1.2505. Coffee had fallen in six straight sessions through Wednesday.

Small markets like the $4.5 billion one for coffee futures often trade on an investment approach that uses chart-based technical indicators to guide prices, when news about real-world supply-and-demand fundamentals are infrequent. In coffee's case, brokers and traders say the moves have been technically driven--and that the next support levels for it are far below the market's current price.

"We're in a bear market, it's been falling for months," said Adam Sarhan, chief executive of investment firm Sarhan Capital in New York. "You have a lot of supply and not a lot of demand."

The bout of selling may have at first been prompted by the weather outlook in Brazil, the world's largest producer of Arabica coffee beans. The country is amid the start of the mid-year harvest season, and after a bout of rains in the coming days, dry conditions are expected that should aid crop picking. Meteorlogix said there would be "mostly favorable conditions for the coffee harvest."

If it occurs, a Brazil crop of more than 50 million bags is expected to put more pressure on prices. "Market forces continued to have a mostly negative tone," research consultancy Hightower Report said in a note.

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In other markets, sugar futures climbed 0.4% to 11.42 cents a pound as traders awaited a report on Brazil's sugar production, while cocoa prices fell 0.6% as traders braced for what is anticipated to be disappointing Asian demand data, which will be released Friday. Frozen concentrated orange juice futures were down 0.4% at $1.2345 a pound and cotton futures were up 0.4% at 64.83 cents a pound.