The financial media has been focusing on the financial storm brewing on Wall Street, but today I’m here to tell you about a financial storm of a different sort. You see, the weather can have a palpable impact on financial markets, and right now it looks poised to send one of my favorite soft commodities soaring. Here’s everything you need to know to bet alongside me today…

Right on cue, the announcement last week of higher storm estimates for the 2010 hurricane season has started to impact commodities. The National Oceanic and Atmospheric Administration, is predicting an above-average year of tropical storms for the Atlantic basin.

According to USAToday:

The agency’s forecast for 2010, released today, calls for 14 to 23 named storms in the Atlantic Ocean, Caribbean Sea and Gulf of Mexico.

Of those named storms, 8 to 14 should become hurricanes, including 3 to 7 “major” hurricanes, with wind speeds above 111 mph, the agency says.

Tropical storms are given a name when wind speeds reach 39 mph, and are upgraded to hurricane status when sustained winds reach 74 mph. An average Atlantic hurricane season sees 11 named storms, including six hurricanes, with two becoming major hurricanes.

If this outlook holds true, this season could be one of the more active on record,” NOAA chief Jane Lubchenco said today at a press conference.

Some of the markets most affected by hurricanes are surely the soft commodities – coffee, sugar, and cocoa – which I want to discuss now.

First Tropical Storm of the Season Supports Softs…

Storms are a big deal for commodities because they impact the supply and demand equilibrium that would otherwise take place in the market. If a major storm system severely restricts coffee production, for instance, supply gets choked off, and prices rise as a result. That’s a very good thing for commodities investors who place bets expecting prices to rise during storm season…

Right now, I think that one particular soft commodity – coffee – could be best poised to profit.

Coffee looks ready to test the $1.38 level for the third time since April. With the close today above $1.36, +1.6%, prices are at the highest level in more than two weeks. A strong triple bottom with prices holding $1.30 January, March and now April/May is very encouraging for bullish rallies.

Here’s more from Bloomberg:

Coffee futures climbed the most in four weeks after a tropical storm slammed Guatemala, Central Americas largest producer. Cocoa also gained.

Landslides and flooding killed at least 82 people and left 53 missing, David de Leon, a spokesman for Guatemalas national disaster agency, said yesterday. Downed bridges and landslides cut off access for some coffee growers in western Guatemala, said Lucrecia Rodriguez, a deputy manager at Anacafe, an industry trade group.

People are concerned about the conditions in Guatemala, said Tom Mikulski, a senior market strategist at Lind-Waldock, a broker in Chicago.

Arabica coffee for July delivery rose 2.4 cents, or 1.8 percent, to $1.3665 a pound at 11 a.m. on ICE Futures U.S. in New York. A close at that price would mark the biggest gain for a most-active contract since May 3.

Cocoa for July delivery gained $18, or 0.6 percent, to $2,983 a metric ton in New York. The price dropped 8.5 percent last month.

When it comes to staking out your own coffee position, time is of the essence…

Needless to say, I’ve already briefed my Resource Trader Alert readers on the coffee spread play that I think is best positioned to profit as the spot price continues to climb. Our coffee spread position looks especially attractive right now since the higher strike options have little chance of any return.  (And obviously, you can get that specific trade by accepting a risk-free trial to my service.)

But if you’re willing to accept a less super-charged path to coffee profits, you can get decent exposure to the soft commodities through an exchange traded note, the Barclays Capital iPath Coffee ETN (NYSE: JO).

To a lesser degree, the Bloomberg CMCI Food ETN (NYSE: FUD) provides some exposure to coffee as well.

Stay tuned for pending alerts to take advantage of the renewed upward price action in coffee.

It all comes back to commodities,
Alan Knuckman
Penny Sleuth

June 8, 2010

Alan Knuckman

Alan Knuckman brings two decades of commodity trading experience to his role as managing editor of Resource Trader Alert, a weekly newsletter providing analysis and real-time updates on current and evolving market conditions. His options, futures, and currencies experience have made him a sought after commentator on issues shaping both hard (extracted or mined) and soft (grown or produced through the agriculture industry) commodities. He is a frequent guest on major international media outlets including CNBC, Sky News, MarketWatch, Bloomberg, Fox Business Network, CNN Money, and Reuters.

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