Options whirlwind shatters rally in coffee futures

download (4) Coffee futures slumped nearly 7%, pulled lower by large trades in the options market, despite a warning from a leading industry group of "fragile" supplies and "promising" demand prospects.

New York coffee for December delivery tumbled 6.7% to 265.10 cents a pound at one point, the contract’s biggest drop in more than a year.

The drop followed hefty purchases of puts, offering the right to sell, on the last day of options trading for October.

"JP Morgan bought 3,000 puts this morning" against coffee prices of between 270-290 cents a pound, Jurgens Bauer at PitGuru said, adding that, with it being expiration day for the October options "anything is possible", with such events prone to sparking "wild moves".

He added: "Coffee has me thinking bearish. I am not alone in that regard either as several others also seem to agree."

Supply pressure

Separately, Rabobank analysts warned that they saw arabica futures, which in August gained 19% in a run of gains lasting 14 successive days, "correcting lower as the coffee year begins and more supply reaches the market", notably from Brazil.

The market for robusta coffee, traded in London, was adding further pressure, depressed to within 8% of its 2011 low by prospects of a bumper harvest in Vietnam, the top producer of the bean.

"Falling values on other coffee markets are also expected to pressure the New York market flat price," the bank said.

‘Fragile balance’

However, the International Coffee Organisation warned that coffee’s "supply-demand balance continues to be fragile", with world consumption exceeding production by 1.5m tonnes in 2010-11, and still growing.

Output, meanwhile, is set to dip to 130m bags in 2011-12, depressed by an "off" year in the cycle of higher and lower output seasons in Brazil, the top producer of arabica beans.

The ICO added that demand could, in theory, hit 168m bags by 2019 if it continues at the rate so far in the 2000s of 2.5% a year, driven by increasing coffee drinking in producing countries, notably Indonesia and Mexico.

While a growth rate at this level in fact looked difficult to maintain, demand still looked likely to beat the 151.5m bags forecast by the United Nations Food and Agriculture Organization.

New York’s December arabica contract stood 5.3% lower at 269.00 cents a pound in late deals.


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