Will the heat wave lead to a rebound in coffee prices?

Two factors contributed to the September price declines in the coffee market: a very good harvest season in 2020 and the extremely high number of long positions that have recently been reduced. However lately market has focused on a phenomenon called La Nina, which could lead to a series of droughts and heat waves in South America. The weather anomaly is therefore a potential threat to next year's harvest in Brazil, which would probably be reflected in the rise in coffee prices. On the other hand, coffee is by no means oversold yet, hence the hot weather should not be considered a "safe bet". However, this does not change the fact that in Brazil market participants are already talking about the scale of potential losses on the production side.

Decreasing number of long positions amid a record low number of short positions - both factors could have contributed to the September declines in coffee prices. Source: Bloomberg

Previously coffee price has reacted to the 77-day moving average. As long as the price sits below it, then further declines towards $104 remain possible. On the other hand, a sharp break above $113 level could pave the way for a bigger upward move towards $127. Source: xStation5