Andres Agredo, June 08, 2017
“Physical coffee market fundamentals are counting less and less for futures markets, now leaded by algorithmic hedge funds and their short-term interests. We need to develop politics to protect coffee growers’ interests against those of short-term speculators”, said Brazilian coffee broker Escritório Carvalhaes, recently.
Commonly, I can feel the pain of my friends and partners whom do their best at seeding, growing and benefiting their beans with the highest quality standards to produce an excellent cup of coffee, when they see the price of their product slumping on-exchange, often with no clear reasons.
Their frustration is not illogical. Coffee futures, with annual levels of implied volatility fluctuating from 25% to 50% make it one of the most volatile, if not the most volatile on-exchange traded commodity in the world. That makes coffee growers oftentimes find themselves selling their hard worked final product at prices even 30% lower than those at what they were doing so, just a couple of months earlier.
Futures markets, although initially thought as a hedging risk mechanism for producers and processors, have opened the door to people like myself –speculators or “specs”- (those both loved and hated) whom want to profit from price fluctuations without being involved in physical deliveries, a fact that certainly provides liquidity to the instruments traded, it frequently push prices to over extended moves, though.
(Well… when I talk about physical deliveries, to be honest, I don’t dislike the idea of getting a container full of coffee in my office, while I enjoy drinking and trading it 😉
But these moves many times don’t tally with market fundamentals! At least, in the short-term…
As a Portfolio Manager running a coffee-focused hedge fund (Commodity Trading Advisor), I’m often asked by investors if I’m a fundamental or a technical trader. Is there a right answer??
When it comes to trading futures and options markets on a speculative basis, it is not about what drives my trading decisions; it is about making money, nothing else. As a financial trader, I can be right on fundamentals… but be crushed if I’m not also right on price!
I have always stubbornly believed that if I am going to trade a financial on-exchange traded instrument that prices the physical delivery of a given commodity, in my case, coffee, I must know every single aspect of the physical coffee industry.
I must feed me with day-to-day developments and assessments coming from my friends and partners on each tier of the supply chain, whom manage an impressive experience on their field, working on a mutually beneficial relationship and with brotherhood spirit (not assessments coming from those informational sources that not even know me and may only want me to act according to their interests), because those developments in the physical industry may have or may not have an impact on the supply and demand of the financial instruments I trade, now or in the future.
But when it comes to buying and selling coffee futures and/or options, I must analyze what buyers and sellers of those financial instruments are currently doing and what they are most likely going to do in the near future, taking precisely keys that they give me through their flocking behavior in financial markets, and then, using those previous fundamental assessments to take measures to reduce risks on my current position, in case of my fundamental and technical-quantitative outlooks are opposite.
And that’s my role in all the groups I belong among Colombian and Brazilian coffee growers: blending what may cause an impact on buyers and sellers with what they are actually doing, in order to get a powerful picture of the market and to take positions that will help both myself to make money and my friends to protect their businesses. That’s when knowing how to make money in the coffee futures and options markets rewards not only in monetary terms: when while doing what you love, not only you make your dreams come true but also help others to do so.
See you at the next post!
Cafe Trading Advisors / Commodity Trading Advisor, NFA Member.