Coffee is shaping up to post a strong monthly close which bolsters my medium-term bullish view. Moreover, while not my core scenario, I would not rule out a significant spike in prices over the coming months, as has happened in the past.

My colleagues at Business Monitor Online recently alluded to this potential in late June. Admittedly, global supply of coffee should improve over the coming months as the bumper Brazilian 2010/11 harvest progresses and as Brazilian exports peak in October. However, despite farmers having passed the half-way point in the 2010/11 harvest, local Arabica prices in Brazil have continued to trend higher in recent weeks. To me, this suggests that current local market tightness may be considerable. Moreover, despite the impending surge in supply, I expect the global market to remain tight on a historical basis. As the market attempts to price in these opposing dynamics, coffee prices could trade in a very volatile fashion.

Other considerations suggest that this volatility could lead to a significant spike in prices. First, the opaque nature of global stockpiles has historically forced the market to rapidly price in underlying tightness once it becomes apparent. This was the case in both 1994 and 1997, when prices exploded higher and nearly tripled over the course of several months. Second, I see room for significant further long positions in the ICE coffee market. While high, net speculative positions remain below the levels seen in 2007-2008. Finally, the technical picture is robust. Currently trading at USc173.05/lb, front-month (September) coffee looks set to post a strong monthly close above the 2008 peak of USc169.60/lb.