Are Coffee Prices Ready To Boil?

By Casey Murphy | July 03, 2014 AAA

Over the past year coffee has been the commodity of choice amongst investors. In an earlier article, we mentioned that coffee prices rose 85% since the start of the year and that they were nearing an influential level of resistance. Since mid-April short-term selling pressure has dominated the spot futures and the resistance levels in fact have driven the price down toward the long-term support of its 200-day moving average. As you can see from the chart below, the futures price of coffee has notched a new short-term low at $1.65 and recent buying pressure near this influential support level suggests that the uptrend is about to resume. (For related reading, see: For Traders, Coffee Is The Other Black Gold.)

As you can see from the chart below, the MACD indicator has recently crossed above its signal line. This technical buy signal suggests that the momentum is in favor of the bulls and that a move toward the swing high of $2.19 is likely in the making. Since traders are expecting a rise in coffee prices over the coming few months, it's only practical to examine how this will impact major coffee producers and companies that use coffee as a significant input.

Rising Prices and Consumers

In general, traders are often happy to see technical buy signals that suggest prices over an asset are likely to increase over the coming weeks. But the consumer perspective is not so welcoming. Higher prices of coffee suggest that companies like Starbucks Corp. (SBUX) will need to pay more for their primary inputs and will likely pass these costs on to the consumer. For investors, this works as a Catch 22; higher prices can often lead to higher profits, but can also mean lower consumption and reduced profit. Based on the recent price action, the strong move above the 200-day moving average suggests that higher coffee prices will work in favor of Starbucks over the short term, and as a result, the near-term price target would be near the high of $81.76. (For more, check out: A Look At Corporate Profit Margins.)

Inelastic Demand Means Higher Share Prices

Since the "daily grind" is such a habit for so many people, it also means that the demand for the underlying commodity is considered to be inelastic. This means that supply and demand is generally unaffected despite price changes. It would take a significant price increase to take hold before the average consumer changes their morning coffee habit. Given the strong fundamentals, Keurig Green Mountain Inc. (GMCR) seems to be perfectly positioned. As many of you know, GMCR is the $20 billion business behind the K-Cup and the Green Mountain Brand. As you can see from the chart below, the strong demand for the shares over the past few months combined with rising prices of the underlying commodity suggest that this stock could be poised to head higher over the coming months. 

The Bottom Line

The spot price of coffee has been under pressure recently. However, strong support from the 200-day moving average and the recent bounce off this level suggests that coffee prices are headed higher. It wouldn’t be surprising to see prominent companies such as Starbucks and Green Mountain pass these price increases along to the consumer. Based on the charts above, traders will likely be looking to enter a positron and protect themselves from losses by placing their stop-loss orders below long term support levels identified by the red lines. (For further reading, see: A Primer On The MACD.)

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