Tag Archives: coffee

COT Report – Coffee Sellers Ahead of Seasonal Weakness

Coffee futures have been trending lower since October of last year. As always, coffee trends are anything but smooth as seen by the spikes in the included chart. Whether these spikes washed out short positions or simply forced them through some pain is not the point of these spikes. Today’s point is how to use these spikes, like the current one, to initiate new short positions inline with the commercial traders. Hopefully, this avoids being stopped out or having to endure too much pain while still participating in the opportunities that trading coffee futures presents.

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Coffee Futures Catching a Bid

The coffee market has always been one of the speculative stars of the futures’ markets. This is due to the large contract size of 37,500 pounds and this market’s typical volatility. Even at the currently depressed prices and low volatility, the average range is still more than $1,300 per contract, per day. This market is famous for its fast, giant swings and the associated sums of money made or lost. Fortunately, the recent decline in coffee’s volatility comes at a time when commercial long hedgers, the coffee roasters, are laying in stores for future production. Their buying serves as a proxy for fundamental data and valuations. While we can’t afford to hold positions the way hedgers do, we can put the leverage of their hedges to work for our own speculative purposes.

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Weekly Commodity Strategy Review 09/05/2014

This shortened holiday week began with our piece for Equities.com on the coffee futures market and the peculiarities of Coffee Futures Expiration Analysis. We discussed the roll from the July to December contract and the effect we thought it would have on the market as it made new highs for the move.

Our primary piece this week focused on the Live Cattle futures market and the spread between the expiring October and newly liquid December contracts. We noted the difference in the change in open interest and depth of decline between the two contract months and predicted, “One More All-Time High Coming in Cattle.” We also noted the similarities in the technical setup between the current live cattle situation and the False Breakout in Gold and Silver that we wrote about in July. The more often we see the same patterns reflect the same outcomes the easier they are to recognize going forward.

Lastly, the European Central Bank cut their interest rates and moved the overnight rate to negative. This is the same type of Quantitative Easing that our Federal Reserve has used over the last few years to pump money into a deflating economy. This move caught many traders off guard, but we wrote about it last week in, “Hand Quantitative Easing to Germany” as well as discussing how the US can use this our advantage.

Have a wonderful weekend and we’ll be back bright and early Monday morning with a new piece for TraderPlanet.

Sincerely, Andy Waldock.

Coffee Futures Expiration Analysis

Commercial coffee traders take advantage of speculative short covering in the July contract to create new short hedges in the December contract. The strength of their selling clearly states that coffee farmers are thrilled to sell their crops at these prices thus, hedging their forward risk.

negative commercial coffee trader position versus coffee futures market
Heavy commercial selling into July coffee futures expiration.

This is a very similar setup to the False Breakout in Gold and Silver. These are examples of why we track the weekly CFTC Commitment of Traders reports as we have determined that their actions, based on their fundamental sense of value in their own markets are the most consistent predictors of future market movement. Find out more and register for a free 30 day trial at COTSignals.

See the rest of our Coffee Futures Expiration Analysis for Equities.com

Softening Commodities Ahead

Louise Yamada, a very well respected technical analyst was recently on CNBC discussing the case for a, “death cross,” in the commodity sector. While I agree with the general assessment that commodity prices as a whole could soften over the next six months, I take issue with the market instrument she chose to illustrate her point, the CCI as well as the general uselessness of this instrument as an investment vehicle. Therefore, we’ll briefly examine why we agree with the softness of the commodity markets and what I believe will follow shortly thereafter as well as a useful tool for individuals looking for commodity market exposure.

The CCI is the Continuous Commodity Index. This index originated in 1957 as the CRB Index as named by the Commodity Research Bureau. It’s been revised and updated many times over the years to generally represent an equal weighting of 17 different commodity futures contract and is continuously rebalanced to maintain an equal 5.88% weighting per market. This really was the pioneering commodity index contract and was traded at the Chicago Mercantile Exchange actively until the early 19990’s. The proliferation of commodity funds and niche indexes since then has rendered the CCI useless and untradeable. In fact, the Intercontinental Exchange that held the licensing for this product delisted it this past April.

Louise Yamada’s point that the commodity markets may be softening is worth noting. She attacked it from a purely technical standpoint. She used the bearish chart pattern that was setting up on her hypothetical contract to illustrate the waning nature of the commodity markets’ failed rally attempts over the last year to suggest that there is more sell side pressure on the rallies than there is a willingness to buy on the declines. She further illustrated her point using the “death cross” of declining moving averages to suggest further bearishness was in store for the commodity markets cleverly noting the frown pattern made by the highs over the last two years.

I’m a big proponent of technical analysis as well as chart pattern recognition (Our Research) however, my reasons for generally bearish commodity behavior over the coming months has far more to do with the sluggish nature of the global economies. China is still the primary source of global economic expansion. Their economy is both large enough and strong enough to buy the world time to work through the overexpansion and corresponding crash of the housing/economic bubble that hasn’t been completely digested, yet. Furthermore, the unabated quantitative easing has lost its ability to boost the economy as a whole and is simply fueling an equity market bubble as the world’s largest players seek parking spaces for the ultra-cheap money that only they have access to. Therefore, until Europe turns the corner and we begin to reconcile the difference between the doldrums of our economy and the exuberance of our stock market, the end line demand for commodities will remain soft.

The flip side to the waning demand story is that once the tide turns, all of the liquidity that’s been pumped into the global economic system will finally trigger the next massive commodity rally. The first leg was fueled the Federal Reserve and Mother Nature. Massive quantitative easing in the wake of the housing collapse fueled massive speculation in gold, silver and crude oil markets. This was followed by one of the worst droughts in U.S. history sent the grain markets to all time highs. Clearly, we’ve gotten a taste of what happens in the commodity markets when there’s a rally to be had. Money attracts money and that’s why we saw the evolution of the Continuous Commodity Index from a single to contract to every conceivable niche market in futures, ETF’s and index funds.

Some of these niche markets have developed a strong enough following to make them tradable. The most liquid commodity futures index contract is the Goldman Sachs Commodity Index Excess Return contract. This is based on the Goldman Sachs Commodity Index (GSCI) affectionately termed the, “Girl Scout Cookie Index” by floor traders when it came on the scene in the mid 1990’s.

This market currently has an open interest of more than 25,000 contracts. The bid/ask is relatively wide at approximately $100 per contract difference but the liquidity is solid with a total of more than 100 bids and offers showing on the quote board. This index, like the old CCI is still heavily weighted in the energy sector with Brent crude and West Texas Intermediate crude accounting for nearly half of the weighted index. The bright side is that this index only has a margin requirement of $2,200. Ironically, a half size mini crude contract requires $2,255 in margin. You can find all futures market hours and point values here. The balance of the index is weighted 15% towards growing commodities like wheat, corn, coffee and sugar. Livestock comprises another 4.5% and metals makes up about 10.5%.

This fall and winter should provide time for the markets to finish digesting some of the previous boom cycle’s excesses. We’ll also have lots of global data coming from Japan, China, India and Germany as well as a new Federal Reserve Board Chairperson of our own. The trillions of Dollars that have been poured into the economy will eventually end up chasing returns. That will be the point when inflation begins to creep in. Weaning the economy off the monthly doses of funding is becoming harder and harder with each dose administered and the major players won’t be happy about it. Therefore, it’s sure to continue for too long and will only be reigned in once it’s too late.

Finding a Bottom in the Coffee Market

The coffee market is what you’d call a professional traders market. It is a large and volatile contract, which leads to equity swings that are too large, even with a single contract for small traders to withstand. Furthermore, commercial traders dominate the market through their access to global information and deep pockets. The coffee futures market has been in decline since May of last year, losing half its value from the $3.08 per pound high. Even with the decline in volatility as the market has collapsed the average daily range over the last month is still nearly $.04 per pound which equals an average cash account fluctuation of $1,500 per day, per contract. Those wishing to participate in the coffee market without the use of leverage may want to look at the coffee Exchange Traded Fund – JO.

The May highs are a good place to start looking at the commercial traders’ forecasting ability in this market. The International Commodity Exchange in New York, formerly the New York Board of Trade held 1.6 million bags of coffee in their warehouses when the market made its high last year. Commercial traders sold into this rally and accumulated a net short position of more than 38,000 contracts. As you might expect, this left small and large speculators with their largest position of the rally, right at the top.

The next piece to look at is the Commitment of Traders Index. This is the most common tool used to measure the participation of the primary market participants; commercial traders, large speculators and small speculators. The index normalizes the total position to a 0-100 scale. Zero is the most bearish and 100 is the most bullish while crosses above 70 and below 30 indicate overbought and oversold levels and sets traders up with a trigger mechanism. This tool would have been of little use as the market declined since the index has been stuck above 70 for commercial traders since late September of last year as the commercial traders began buying to cover their short positions initiated last May.

This is why we analyze the raw data and scale it down to daily levels with appropriate stop loss placements. As a trader myself, I have to look for opportunities to maximize my time in the market and the less time I spend in the market, the less overnight or, news event risk I have to take on. We’ve picked up eight trades since last September using the daily method we publish with 6 of them being winners, including buying the June lows and selling the July highs.

Coffee hasn’t been this cheap since June of 2010. Coffee warehouse stocks at this time were 2.2 million bags and the commercial trader position was net long 26,000 contracts. Currently, warehouse stocks are 2.5 million bags but, more importantly, the commercial long position is now more than 56,000 contracts. This also sets a record in managed money short positions. Referring back to the 2010 lows, we saw the same situation without quite the levels of determination by the market’s participants and that imbalance led to a 13% rally in eight trading sessions and was worth $8,250 per contract.

I’m not suggesting that the market is immediately set to turn around and put $8,000 in anyone’s pocket by Christmas. I am suggesting that the coffee market is extremely oversold. The typical resolution to this market’s imbalances lies in favor of the commercial traders. Furthermore, any managed money in the futures market that has called for redemptions due to the pending tax changes will see their profitable positions offset. This could fuel some buying and get the ball rolling.

Finally, it’s important to track the markets’ players and keep track of the winners and losers. This requires a greater attention to detail than just a quick glance at a normalized index. Tracking the raw data for each trader category allows us to compare historical levels of trader involvement as well as tracking their movement relative to warehouse stocks to ascertain the degree of scarcity in a market.

We will be actively looking for opportunities to buy the coffee market and fully expect at least a tradable bottom being formed somewhere in the $1.40 – $1.50 range.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

Coffee Topping Out?

Traditional agricultural commodity markets have always been subject to supply disruptions. Think about the mid-west flooding of the mid 90’s, mad cow disease, Florida orange crop freezes as well as labor strikes and political coups. Almost two months ago, we talked about trading the coffee market. We noted that the two major growing regions both had weather related problems and that’s what was driving up the price. There’s one other primary reason for commodity market supply shocks and that is the lack of substitute goods.


All commodity markets have very specific contract specifications that must be met in order for a producer to deliver their product to the exchange’s warehouses. The coffee market in the U.S., which is the by far the most dominant, accepts delivery on Arabica beans through 19 global warehouses. Arabica beans only make up about one third of the coffee crop and are the source for premium coffee blends. Robusta coffee is much more common. Robusta coffee is used in instant coffee and coffee blends because it grows quicker, is a hardier plant and has high caffeine content.


The coffee market has seen supply shortages before. In 1996, total warehouse stocks declined to 321 bags. This meant the New York Board of Trade, now the Intercontinental Exchange, had just over 42,000 pounds of coffee on hand to meet global delivery demands. Consequently, prices shot up to more than $3 per pound at the exchange. By contrast, the current supply, which is down 44% for the year, puts the exchange’s coffee stocks at 1.7 million bags for December. Arabica coffee producers in Brazil and Central America ramped up production in the wake of 96’s shortage. Those trees began to produce around 2000 and the coffee market bottomed in 2002 on the flood of their second harvest.


Much of this coffee has been sitting in storage for years and remained in the system through a loophole in which producers would take delivery of their own old stock and then resubmit it for certification. The bags then came in as new stock. Recently, this coffee has been making onto the market. Coffee roasters have taken delivery from the exchange only to find that the beans they bought were unusable. As a direct result of this, the Intercontinental Exchange has rewritten the delivery specification for their coffee contract to protect the integrity of the exchange and in doing so, created an interesting setup for a commodity trade.


First of all, they are now penalizing warehouse stocks more than 720 days old. This closes up the delivery and retender loophole. Secondly, they are going to begin accepting robusta coffee beans at a discounted value as deliverable against the Arabica contract. This will open up the delivery ports of the ICE’s 19 world -wide warehouses to a global supply of fresh, deliverable coffee. Furthermore, this develops multiple production centers and weakens Brazil and Central America’s ability to monopolize the prices by controlling more than 50% of global Arabica bean production.


Commodity traders will see these changes manifest themselves in increased exchange liquidity, which translates into lower volatility with fewer and milder price spikes. Volatility will also be eased as Brazil continues pour money into the development of its own infrastructure with more than 1 billion dollars currently earmarked specifically for coffee production.


When we last talked about coffee, we noted that commercial consumers had been buyers of the market to lock in end line production costs. Trend following commodity index traders as well as small speculative traders have climbed aboard coffee’s upward trend as it has marched to 13- year highs. However, general coffee market sources have priced in a balance of trade ceiling around $2.70 per pound, which is about 15% higher than the current market price. The bearish combination of the exchange’s rewriting of the contract specifications combined with the market nearing its pre-forecasted top leads me to believe that commercial producers will begin selling this market in earnest in order to lock in their forward production at these attractive prices. We will watch this development closely. It has the makings of a bull market climax.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

Diversification is not Immunization

Every market crash or bursting bubble is like the ice cream truck calling kids to the street. Portfolio managers and re-balancers know they get the opportunity to truly be heard only when something goes wrong.

Most people live their lives reacting to new stimulus. If something hurts, they don’t do it again. If something works, there’s no reason to change. Portfolio managers attempt to anticipate areas of pain and mitigate that pain wherever possible. However, there are times when efficient portfolio analysis, modern portfolio theory and just plain common-sense investing will still force one to endure periods of pain.

Portfolio composition is usually based on a collection of assets that tend to relate to each other in a predefined and expected way.

There are three basic relationships:

— Positive correlations: Two asset classes rise or fall together, predictably.

— Negative correlations: One class rises when the other falls and vice versa, predictably.

— Non-correlational: No predictable relationship.

The right balance of these relationships across multiple asset classes will smooth out returns and help to insure the predictable performance of one’s portfolio.

There’s an old saying from statistics 101: “Correlation does not equal causation.” We can measure how markets move relative to each other, but without understanding their relationships, we can’t say for certain what caused what. Sometimes, understanding “why” has a bigger impact on one’s portfolio than the actual mix of assets.

Last week we saw many markets fall. The stock market is lower, as are precious metals, bonds, grains, coffee, sugar, cocoa, crude oil and the energy markets. Many of the classic market relationships people use to balance their portfolios failed to behave in the anticipated manner and did not balance the risks associated with investing. Markets can and do, behave in unanticipated ways.

Commodity markets have been trending toward generally higher prices. The stock market has also had a nice rally and is up more than 9 percent since Labor Day. During this time, the Federal Reserve Board also announced a second round of quantitative easing to keep interest rates low and weaken the U.S. dollar. Consequently, bonds have rallied in price while the dollar has fallen.

The sudden about-face in many of the markets is twofold. First, the news regarding Ireland’s financial health has become increasingly pessimistic. Ireland was on the financial default radar, along with Greece, more than six months ago. Ireland has been very proactive in implementing domestic austerity measures to rein in spending. Furthermore, Ireland has also steadfastly maintained its financial issues are limited to a few banks that became overleveraged during their own housing bubble.

Unfortunately, the European Union has the same fears about Ireland and Greece we did in the U.S. with our own domestic banks and that is that every bank was more overextended than initially thought, requiring an even bigger lifeline to maintain solvency. Finally, Portugal and Spain are also on the verge of financial insolvency themselves.

The second fear to hit the markets was China’s announcement Wednesday its economy may be overheating again. Rumors are circulating China may follow several banks in Korea in raising its interest rates to slow down inflation and thus, economic growth. The data coming out of China certainly reinforces the idea it may constrict lending in the near future. China has a published cap on the amount of money its nationalized bank will lend in any calendar year and it is quickly approaching that ceiling.  The fears are also evident in China’s stock market, which has slid more than 5 percent in the last few sessions.

These two events combined to cause havoc in our domestic markets as they immediately unraveled the underpinnings of our market rallies. The Chinese news sucked the demand out of the commodity markets. China’s clampdown on inflation is pulling money out of the commodity markets and reducing overseas demand for raw materials. The news from Ireland and the European Union has the equity markets spooked. For many investors, the 50-percent correction in the equity markets from our own financial crisis is all too real and all too recent. Our domestic stock market’s rally and the quickly approaching year’s end makes it easy for many traders and investors to simply pull money out of the markets.

News events shock the markets and broadly sweeping economic forces create seismic shifts in market behavior. During these turbulent times, typical market relationships may fail to behave in the predicted manner.

As the Chinese economy becomes a first class consumer, we must accept our role as a supplier, rather than our historical position of end line consumer. As a supplier, we need to recognize the demand-needs of our trading partners. This is a broadly sweeping change that will affect the commodity markets for years to come.

News from Ireland and the European Union can shock the stock market, reawakening nightmares of 2008, but plans can be made to account for these events.

It does require proactive management of one’s portfolio. The old days of the passive hedge and allocation strategies may be gone.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

Trading the Coffee Market

Is the price of that morning cup of coffee doing more to wake you up than the coffee itself? Lost among the commodity headlines of gold, silver and oil prices, the price of coffee has risen to a thirteen year high over the last three months. Starbucks, Millstone, Caribou and others have all been forced to raise their prices to account for the increased price of their raw materials and the rise in prices has not been confined to high- end purveyors. Both J.M. Smuckers and Kraft Foods have been forced to raise prices on their Folgers and Maxwell House brands respectively.Currently, McDonalds is the only outlet able to hold their prices steady.

Coffee prices have risen 45% since the beginning of June due to serious production issues in multiple geographic locations. The extended length of the Asian monsoon season has affected the harvest of India, Vietnam and Thailand. These countries are responsible nearly 30% of global coffee production. While an extended rainy season has delayed the Asian crop, Brazil’s has been hampered by lack of rain. Brazil is the world’s largest producer and according to the Brazilian Coffee Council, the drought they’ve suffered through could cut production levels to the lowest output in four years.

The fact that retailers have been able to keep their prices reasonable, raising their prices around 11% on average is a testament to the necessity of the futures markets and their role in the economy. The futures markets were originally designed to allow producers and end line users of commodities to create binding contracts that specified the delivery date, price and quantity of the given commodity. Coffee retailers have been able to stay ahead of the rising prices by hedging their price risk in the coffee futures market. Contracts that were purchased prior to June have the benefit of the stable prices that coffee had been trading at for nearly two years.

Trading agricultural commodities entails an understanding of the price risk associated with each individual market. Broadly speaking supply and demand are the two types of risk that need to be accounted for. Agricultural commodities have a supply risk factor factored in to rising prices. This protects against any setbacks created during the growing season by the weather as well as accounting for any labor unrest during the harvest season. This is exactly the opposite of the risks associated with investing in the stock market. The fear is on the downside and there is a built in risk premium to the downside. The stock market deals with demand based risk.

Commercial traders are made up of two groups, the commodity producers who control the supply of a commodity and the end line consumers who create demand for the given commodity. These two groups are responsible for the battle to create value. When a market gets over valued, commodity producers come into the market and sell the crop they expect to produce within a given time frame. Conversely, when the price of a commodity falls below a perceived fair value, end line consumers like Kraft Foods and J.M. Smuckers will come into the market and stockpile the commodity to meet their future production needs.

This is the battle that’s currently unfolding in the coffee market. Coffee retailers are being forced to pay higher prices to ensure their raw materials for future production while coffee producers are taking advantage of the higher prices to make up for their lack of output. Tracking the movement of commercial trader positions through the commitment of traders report shows that end line consumers were large purchasers of coffee futures beginning at the end of June. We can also see that their buying appears to have peaked in early September. This cycle ensured delivery of the necessary raw materials through the end of the year.

Right now, the producers still have control of the market and we will continue to look for opportunities to buy selloffs in the coffee market. This allows us to put the purchasing power of major retailers behind us as well as the seasonal strength that tends to accompany the coffee market harvest period and into January. Our opinion will change when we begin to see the coffee producers rush to get their future crops sold. Whether the rush comes at higher prices or lower prices isn’t as relevant as the fact that farmers believe they won’t be able to sell their crops at these prices in the near future.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.