Colin Barr

Following the money in banking, economics, and Washington

Coffee perks up

October 21, 2010: 3:52 PM ET

Is something brewing in coffee futures?

The price of coffee for December delivery broke through $2 Thursday for the first time in 13 years, the Wall Street Journal notes. Coffee has risen 50% in the past few months, as wet weather trimmed harvests and investors flooded into commodities markets seeking a hedge against the inflationary stylings of central bankers.

Are traders milking it?

It is the latter factor that likely explains coffee's recent rally, says Adam Grimes, who tracks commodities for Waverly Advisors in Corning, N.Y.

He says the surging prices of other so-called soft commodities, such as cotton and sugar, suggest that a massive flow of investment funds is driving trading, rather than changes in the supply and demand profile for the actual goods.

"There are pools of money moving around here, like people running from one side of the boat to another," Grimes said. "The market is supposed to be smarter than individual people, but it doesn't really work out like that."

This has happened before, he hastens to note. Coffee surged as high as $4 a pound in its 1997 rally, before giving back those gains and more. Only twice since then had coffee even challenged $2, before Thursday's action.

So is coffee heating up again? Grimes, whose firm doesn't have any positions in coffee right now, says he isn't craving a trade right now but will keep an eye peeled for a few months.

"Coffee for a little while there was the commodity equivalent of the tech stocks," said Grimes. "So $2 doesn't really get my attention, but it's worth looking at because the soft commodities are starting to trade as one."

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About This Author
Colin Barr
Colin Barr
Senior Writer, Fortune

Colin Barr has covered finance for Fortune.com since November 2007. Previously he was a writer and editor for TheStreet.com, winning a 2006 Society of American Business Editors and Writers award for "The Five Dumbest Things on Wall Street," and for Dow Jones Newswires. He is a 1991 graduate of Penn State and lives in Port Washington, N.Y., with his wife Meena Bose and their two kids.

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