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.
Comment:
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.