There have been few comforts for long-only commodity investors lately. With the Continuous Commodity Index down more than 40% since July, it seems buyers have been on a four-month coffee break from most every futures pit and trading ring.

Now may be the time, however, to think about trading coffee rather than drinking it. We mentioned this before ("Coffee Time?"), but it's worth a closer look.

Chartists can argue the technical merits on either side of the current coffee market. You can see the points of contention in the December contract. If you're a glass-half-empty kind of analyst, you'll readily note that a new low was made in October, that prices remain below their 20-day moving average and that the down trend line dating from late February has yet to broken. Optimists, on the other hand, will see a monthlong base building and a trading range that could be the launchpad for higher prices if the fundamentals line up. The relative strength index indicator, too, is neutral; neither oversold nor overbought.

ICE/NYBOT Coffee (December 2008)

Fundamentals

So what about those fundamentals? Supplies were tight going in to the new marketing year because carryover stocks, at 12.4 million bags (a bag contains 60 kilos or 132 pounds of green coffee beans), were 35% lower than the previous year. In fact, the carryover was the lowest in over three decades. For the new crop year, the U.S. Department of Agriculture optimistically estimates production at 140.6 million bags.

World Coffee Production And Use (Millions Of Bags)

(E) = Estimated

Production is likely to be curtailed, however, if the tight credit market impinges on growers' financing of fertilizer and pesticide purchases or labor contracting. According to Juan Lucas Restrepo, commercial manager at the National Federation of Coffee Growers of Colombia, "The credit crunch limits the availability to exporters and cooperatives of working capital. We might see problems in coffee supply if it persists." Colombia is the world's third-largest coffee producer.

Worse still is the USDA's gloomy assessment of Brazil's ending stocks for the 2007-2008 marketing year. Agency attachés report that inventories are "the lowest in the past 50 years and theoretically not sufficient to guarantee the proper flow of product among the different players of the industry." Brazil is the world's leading coffee grower, accounting for more than 30% of global production.

Globally, in fact, we're heading into 2009 with the lowest stocks-to-use ratio in more than 30 years. A bad production year would raise a distinct possibility of shortage.

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