As a routine part of many people's waking up routine each morning, the price of coffee is now itself beginning to wake up. We believe there are strong fundamental reasons for this to be happening. As long time Members are no doubt aware, we have been fans of commodities for sometime and while this initially was limited to hard commodities, we expanded our views to include 'softs' such as coffee towards the end of 2006.

"Increasing affluence in developing nations is leading to strong growth for the bean as western consumption habits spread. China for instance has experienced double digit growth for the past several years."

As a brief reminder, underpinning the commodity bull market in our view are two primary pillars of support. The first is no more complicated than supply and demand whilst the second is linked to our belief that the US dollar is set to weaken further than it already has in the past few years.

This second belief is based on what we see happening in the US. Recent interest rate cuts by America's Federal Reserve have reinforced our view that inflation fighting is not a priority with that country's central bankers. As such, foreign demand for the greenback will continue to wane and as a result the dollar will continue to struggle. Given commodities the world over are priced in US dollars this bodes well for higher prices.

Next we believe the world is undergoing a demand shock for a variety of raw materials. While 'shock' might be too strong a word, the growth in demand has in any case outstripped supply. Driving this growth are fast growing emerging markets led by China and India. Once again the end result is upward pressure on prices.

As we have stated on previous occasions, the impact of this dynamic has spread across a wide range of commodities. One in which we are particularly bullish on is coffee, which we have gained exposure to through ETFS Coffee (LSE, COFF). This security trades on the London Stock Exchange just like any other share and acts as a proxy for coffee, as it tracks the DJ-AIG Coffee Sub-Index.

Although the outlook in America appears to be deteriorating with each passing week, the situation there has not appeared out of the blue. We would say that the writing has been on the wall for sometime.

Equally, we would reinforce our view that the demand *growth* for commodities such as coffee is not emanating from the US but from China, the Middle East, Russia, etc. As such, we expect demand to hold up well in most cases in the face of slower growth in the States.

Coffee is a great example of this view in action. Increasing affluence in developing nations is leading to strong growth for the bean as western consumption habits spread. China for instance has experienced double digit growth for the past several years. Looking ahead, (according to Euromonitor International) coffee sales in China could reach US$3.6 billion by 2011, from US$2.4 billion in 2006. This represents a robust 50 percent increase.

Similar types of growth are occurring in Russia where per capita consumption levels are low relative to more established markets such as the US and UK. Here consumption is like China growing by double digits. Brazil and India are also contributing to the demand growth albeit at slower rates.

So from our perspective, the demand side of the coffee equation appears quite healthy. Meanwhile, supply is not enjoying the same types of growth.

In fact, between 2006 and 2007, supply from exporting countries actually fell over 7 percent according to the International Coffee Organisation. In the case of Arabica beans (the ones that COFF track) the decline was nearly 10 percent.

Leading the decline are growers in South America where Brazil, the world leader, saw output fall a whopping 20.6 percent in 2007. No surprise then that prices for Arabica recently reached their highest in 10 years.

"As evident on the short term daily chart, the outlook for coffee continues to improve. Prices have recently broken from a large triangle consolidation pattern, which had been developing since March 2005."

Political unrest is also impacting the market. In Kenya, violence following recent elections has held back production there and exports in neighbouring Uganda, a much larger producer. This is due to Uganda's need to ship its beans via ports in Kenya.

Longer term, we expect climate change to also be an increasingly important factor on prices. As we have seen in other segments of the agricultural complex, drought and flood are wreaking indiscriminate havoc in selective markets. Whilst this makes a direct relationship and forecast impossible, we believe the impact will no doubt be felt in the years ahead.

So fundamentally there are in our opinion very solid underpinnings for coffee prices to go higher in the year ahead. The technical outlook is in our view equally encouraging. For convenience and accuracy, we are using the rolling front month futures contract, which trades on the New York Board of Trade (NYBOT) and on which the ETF is based.

As evident on the short term daily chart, the outlook for coffee continues to improve. Prices have recently broken from a large triangle consolidation pattern, which had been developing since March 2005. With this consolidation pattern now complete, a strong trending move appears to be underway.

Chartists often observe that such patterns typically form as a temporary pause within a longer-term trend. When they form in an upward trend, a breakout through the upper edge of the triangle signals a release of pent up demand, which often drives prices sharply higher. Just this week, prices have reached a high of $150.25, the highest level in almost 10 years.

By measuring the height of the triangle, and projecting this distance upwards from the breakout level, such patterns can also be used to generate a price target. In the case of Coffee, this method provides a long-term target (for the NYBOT futures contract) in the region of $175 to $180.

So in summary, we believe the long term fundamentals for higher coffee prices remains compelling, and the chart outlook firm. As such, ETFS Coffee (LSE, COFF) will remain firmly held in the Fat Prophets Portfolio. For Members without exposure, we recommend buying COFF around US$3.73.