Tags: coffee | double | wave | overlooked

The Price of Coffee Will Double in Coming Years

By Sean Hyman   |   Monday, 12 Nov 2012 07:40 AM

Commodity traders love chasing what is already in the stratosphere and typically overpriced.

However, I look for commodities that are beaten down and no one seems to be looking at. You see, for some reason, the masses never expect trends to end, especially if they’ve been going for a while.

For instance, it seems no one is expecting wheat, soybeans or corn to decline. Why? They’ve had sharp moves higher and they’ve been in the spotlight on the nightly news.

Even the traditional news outlets (not just the financial news outlets) have been reporting on these commodities and their run-ups. However, by the time it reaches these news outlets and they start paying close attention, you know you’re in the latter innings of that commodity’s ascent.

Well there are several commodities that have been overlooked for quite some time now. Cocoa, coffee, cotton and sugar, just to name a few.

Cocoa is already turning higher and coffee could be next. Why?

The price of coffee has been in a decline for a year-and-a-half now, and no one is looking for it to head higher anytime soon.

But there could be a fundamental catalyst for it to begin to head higher in the not-so-distant future. Why?

Wild Arabica coffee may become extinct before the end of this century because of climate change. Commercially produced Arabica has very little flexibility in coping with climate change and threats from pests and disease, etc. And Africa’s largest grower in Ethiopia says that weather conditions will likely have a negative influence on coffee output there. This could end up impacting commercial coffee production worldwide.

In addition to all of this in the mix, there’s what is going on in the chart of coffee too. Coffee’s price is still declining, but its relative strength signals from the relative strength indicator on its weekly chart is starting to diverge from that and strengthen.

Now this doesn’t mean that coffee has to begin heading higher from here, but what it does mean typically is that the pace of coffee’s decline is slowing down, and that means more buyers are likely beginning to come back into coffee. Once the buyers begin to number enough to overtake the sellers (short sellers), then we’ll see coffee’s trend change.

In addition to this, downtrends tend to unfold in five waves. This means that there are five major moves within a major downtrend. Three long, downward moves and two brief recoils higher between each major downward move.

So far, we’ve seen four out of the five waves unfold, and in fact, we could be in the midst of the fifth one now. Now sometimes these final waves can have a spike lower and seem to “drop off the map” to the downside in a selling climax, as it finally comes to what I call a point of “maximum pessimism.”

September and October have both seen some notable pickups in the selling volume. This means that those who were holding coffee contracts on the long side as buyers have now gotten very frustrated and are now selling much more often. Once this final wave of sellers is washed out, then coffee can begin to increase in price again.

So while we may not be at the bottom just yet, we’re likely in the final innings of its decline. Therefore, get ready for higher coffee prices coming in the years ahead. We could see a good bit of the ascent come within the next 12 months.

This will hurt coffee companies like Starbucks and Green Mountain coffee UNLESS they have great coffee hedgers. If they hedge these costs effectively, they can sidestep this. But if their hedgers aren’t “on their toes,” they’ll get lazy due to coffee’s long-lasting decline and get caught not catching the higher prices soon enough.

However, those who are buyers of coffee exchange-traded funds during this rise will do quite well, and that’s the safer bet, because it’s hard to tell how well a coffee company hedges their coffee costs. I’m sure you’ve probably got to listen in on their earnings conference calls ahead of time to get a gauge of that.

About the Author: Sean Hyman
Sean Hyman is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He is also the editor of Ultimate Wealth Report. Discover more by Clicking Here Now.

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