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Brazilian Dry Spell Stirs Coffee Prices

February 3rd, 2014

Coffee futures staged their biggest rally in eight years Monday amid worries that abnormally dry weather in Brazil would hurt the country's crop.

The dry spell in Brazil, the world's biggest producer of coffee, has forced many traders to rethink their coffee forecasts. In November, many analysts had forecast the Brazilian crop would be a record for the third consecutive year.

Since hitting a seven-year low of $1.0150 a pound in November, coffee prices in the $7 billion futures market have shot up 34%. Prices rose 8.6% Monday to $1.3595 on the ICE Futures U.S. exchange, the highest settlement since May. The contract posted the biggest one-day percentage gain since September 2005.

Dry weather—rainfall in Minas Gerais, the top coffee-producing state, was 60% below normal in January—comes at a bad time. Fruit on coffee trees, which surrounds the beans, still are just maturing.

The price jump underscores Brazil's importance as a commodities producer. Huge harvests drove down prices for commodities ranging from sugar to coffee to oranges in the last two years. Now, those markets have bounced off recent lows, as less than ideal weather conditions dented supply forecasts.

"There are really two things that move coffee—a drought and a freeze; those are the two big wild cards," said Fain Shaffer, president of Infinity Trading Corp., an Indianapolis brokerage. "I wouldn't be surprised to see some really wild swings."

He said prices could reach $1.50 a pound and has placed options bets that would benefit from rising prices.

The arabica-coffee market has seen a particularly sharp turnaround this year. Prices dropped 23% last year after investors bet on oversupply. Since Jan. 28, prices have gained more than 19%, the largest five-day percentage gain since October 2002.

Higher coffee-futures prices can take months to drip down to consumers' cappuccinos. Roasters often buy coffee long before the beans are harvested, so many will be working through cheaper supplies for months. Plus, beans are only part of the cost that coffee drinkers pay. At Starbucks stores, for example, coffee represents just 8% to 10% of a café's operating expenses, the company has said.

Money managers have held a net-short position in arabica coffee since July 2012 as supplies of the beans outstripped demand amid back-to-back bumper harvests in Brazil. During the week ended Jan. 28, they had placed 7,023 more bets that prices would fall than rise, the most since the week ended Dec. 31.

The dry weather is encouraging some investors to cover those bets and then buy even more futures, Mr. Shaffer said.

Since the year began, investors added $25.23 million to the iPath Dow Jones-UBS Coffee Total Return ETN, an exchange-traded note that tracks coffee prices, said, a research and analysis firm. The product was up more than 7% Monday.

Some investors took profits from the move higher. Seamans Capital Management LLC, which has about $150 million under management, bought shares in the iPath ETN between August and November. The fund liquidated its entire position Monday.

"We like the fundamentals of coffee, but when it jumps like this, we're happy to take our profits and reset," said Richard Seamans, the firm's chief investment officer. Mr. Seamans plans to buy the coffee ETN again if futures fall below $1.10 a pound.

It was the hottest January on record for parts of southern and southeastern Brazil, Somar Meteorologia in São Paulo said. Rain isn't likely to fall in Minas Gerais state, which produced about 72% of Brazil's coffee last year, until mid-February, said Patricia Vieira, a meteorological technician at Somar Meteorologia. The arabica-coffee harvest will begin in late April or early May.

Conab, the government crop agency, expects this year's coffee crop to range between 46.5 million and 50.2 million bags, based on estimates released in early January. Others have given different estimates, and some analysts say it is too soon to known by how much the lack of rain will reduce the size of the crop.

Some forecasters had predicted Brazil's harvest would be as high as 60 million bags. Bags are the standard measure of volume and on average weigh about 60 kilograms each. One bag of coffee yields 7,500 shots of espresso. "This changes the bag-count idea," said Sterling Smith, a futures specialist at Citigroup in Chicago. "If the dryness persists, the 60 [million-bag estimate] is obviously off the table."

—By Leslie Josephs and Alexandra Wexler.

Gold Futures Cut Losses on Weaker Dollar, But Set for Four-Week Low

May 16th, 2013  

Gold futures trimmed its earlier losses on Thursday as the dollar fell, but futures were still on track for a sixth consecutive loss as more investors cashed out of the metal.

The most actively traded contract, for June delivery, recently traded down $10.80, or 0.8%, at $1,385.40 a troy ounce on the Comex division of the New York Mercantile Exchange.

Gold bounced off its earlier losses on Thursday as the dollar dropped after weaker readings on the U.S. labor market and mid-Atlantic manufacturing. Dollar-denominated gold tends to move inversely to the currency.

The data "took a little bit of the buoyancy out of the dollar" and lifted gold, said Fain Shaffer, president of Infinity Trading Corp, a Medford, Ore., brokerage.

Still, gold remained on track for a four-week low, erasing almost all of the rebound that followed the record-setting selloff in mid-April. The drop had initially triggered a surge in buying of gold coins and jewelry by bargain hunters, pushing prices higher.

But investors continued to head for the exits. Gold-backed exchange-traded funds, which trade like stocks and track the price of a share of a gold bar stored in a vault, shed gold throughout the slide and brief recovery.

"There's a herd mentality" among gold investors, said Rachel Benepe, a portfolio manager with First Eagle Funds. "When [gold] had this weakness over the last couple months, that scared people, and they've made the decision to sell."

The amount of gold held by such funds fell this week to the lowest level since mid-2011. Filings released late Thursday showed some closely watched hedge funds, including the fund overseen by George Soros, were among those who cut their stake in gold ETFs during the first quarter.

"More news of managers like [Mr.] Soros also cutting holdings of ETFs are keeping bargain hunters at a distance until prices seem to stabilize," said George Gero, a vice president and precious metals strategist with RBC Capital Markets, in a note.

Investor interest in gold, traditionally seen as a safe-haven asset, waned as stocks in the U.S. surged to record highs and worries about the stability of the financial system ebbed. Meanwhile, some who bought gold as a hedge against inflation found less need to hold the metal as price increases in the developed world remained tame and officials at the Federal Reserve discussed pulling the plug on the bank's easy-money policies.

"There's basically no inflation, equities are taking off, and we've got a strong dollar," Mr. Shaffer said. "All of those are just eroding away the investment value of precious metals."

A World Gold Council report released on Thursday showed global gold demand during the first quarter was the lowest in three years, as massive liquidation in ETF holdings outweighed an uptick in demand for jewelry, bars and coins. Sales of ETF gold holdings in the first quarter erased about two-thirds of the ETF purchases of all of 2012, the mining industry trade group said.

-Laura Clarke contributed to this article.

- Matt Day at Dow Jones.

Getting Gassy

June 1st, 2008
  By Chris Mcmahon

Huge liquidity and an easy monetary policy have resulted in more investors looking at commodities as an asset class. "With that, the crude market, as the bellwether of the energy complex has led everything higher, natural gas included," says Eric Wittenauer, analyst at Wachovia Securities. "Prices will remain underpinned because natural gas remains undervalued per Btu compared with crude oil. And domestic prices are considerably lower than international prices," which dictate liquid natural gas prices, he says. In July, he says support is at $10.95.

Not only that, but inventories have gone from a 13% surplus to a 15% deficit over last year, observes Fain Shaffer, president of Infinity Trading Corp. And the Commitment of Traders report shows commercial natural gas traders are net long approximately 23,000 contracts. Further, non-commercials are net short 65,000 contracts, so he infers that there is still a lot of short covering to go, particularly as the commercial category does not pull out the index funds, which add a large amount of long positions.

"The next objective is $14, especially with all the other energies at their highest ever," Shaffer says. In July, support is $12 and ultimately he expects $16 by the end of cooling season. "And that's without a hurricane," he says.

Golden Opportunity

Gold has started tracking stocks and has put in a near-term low

September 1st, 2007
  By Chris Mcmahon

With the U.S. dollar hitting a 10-year low and with a rocky equities market, you might expect gold to explode to the upside. Instead, gold has started tracking stocks and has put in a near-term low, observes Charles Nedoss , senior account manager at Peak Trading Group. "The Fed Funds rate used to be a great predictor," he says, but with the new credit crunch, the U.S. Federal Reserve and other central banks are pumping money into the system to calm nervous investors. That could drive the U.S. dollar lower, reignite inflation fears and push gold up. "As much as we concentrate on our core rate, around the world costs are getting higher and commodities are going higher, too," he says, adding, eventually gold will go with them. He expects gold to challenge $718 per ounce in September and picks a low of $655.

Fain Shaffer, president of Infinity Trading Corporation is bearish gold for the remainder of the year. "It can't seem to break out past $700," Shaffer says. He attributes that partly to hedge funds selling off gold and stocks in an effort to raise cash and deal with the subprime mortgage collapse. "I don't know what to make of gold right now, but if the dollar tanks, below 80, there could be a flight to quality," he says. Shaffer expects gold to trade between $670 and $700 in September.

Natural Gas


September, 1st, 2006
  By Chris McMahon

Natural gas has been an enigma. After rallying to all-time highs at the end of 2005, natural gas futures dropped 66% by July 10, despite the continued bull market in crude oil. And while it rallied more than $3 per mBtu in July, it is not that price action that has analysts perplexed and led to the closure of energy based hedge fund Mother Rock LP, but the dramatic shift in the calendar and volatility spreads. The shift moved the Sept/Dec differential from under $1 to more than $3 from January to April.

Analysts point to weather anomalies such as last winter's record warm temperatures and the increased severity of hurricanes for throwing off normal relationships.

"Recently the spread has been getting whacked," says Alaron energy analyst Phil Flynn, adding, "There is a new dynamic in this market."

Typically gas inventories build during summer months and drop during the winter heating season, but the reverse was true last year as inventories built up during the mild winter and recently dropped in July and August.

Fain Shaffer, president of Infinity Trading, says, "In the past, the big moves have been for a heating play, now it's a hurricane play."

The hurricane factor may account for the spread differential as the December contract faces the full affect of the hurricane season.

Flight To Safety

Nothing glitters like gold.

August 1st, 2006
  By Chris McMahon

In early July gold had already recovered some of its losses when increasing geopolitical instability pushed it up $80 per ounce in two weeks.

With Iran refusing to abandon its nuclear aspirations, North Korea test firing intercontinental ballistic missiles, and Israel bombing the Beirut Airport while militants fired missiles into northern Israel , gold is back on the bull after a major correction .

John Welsh, SVP of Peregrine Financial Group Inc., isn't convinced the bull is back despite recent strength. "I don't expect the U.S. dollar to collapse," Welsh adds . He pegs the high for October gold at $685 with a low of $590.

Fain Shaffer, president of Infinity Trading, says gold is responding to multiple factors and could hit $750. Besides wars, China announced it will quintuple its gold reserves. "The big thing that really made it run was the verbiage in the fed statement that we may be close to an end of interest rate raises," Shaffer says.

Shaffer notes gold tanked to $550 then recovered to break above the 20-day moving average of $600, which he calls the new support level. It will now test $730 or $732. "We may make a double top and start coming down."

Gold Futures

Both of our analysts called for gold to continue its meteoric rise, with Fain Shaffer, president of Infinity Trading, speculating that gold would trade between a high of $550 per ounce and a low of $500. James R. Steel, VP of research at Man Global Research, said gold would trade between a high of $535, with support at $510. After a bit of a correction Comex gold closed well above $550 an ounce on Jan. 13, helped by a slightly softening dollar.

You can find the original articles archived at Futures Magazine.