My trading week was disastrous! Coffee futures went up substantially on Monday. This excited speculators and industry interested in buying, pushing futures even higher during Tuesday and Wednesday. I was down more than 32% on Wednesday morning! During the week I read some expert opinions and as a cause for this price rise most mentioned speculators. Having been very short (as me), they decided to cover a bit and interrupted the downward trend. I think in the end people writing this reviews are just trying to justify (just like I am) why they said price was going and it ended going up. The good thing is we are dealing with fake money and I don’t need to deal with wanting to kill myself for loosing my life savings, or with giving a really good explanation to my boss.
Despite this hit, I am confident on my long-term strategy and will hold my position. I’ve kept finding indicators that there is a huge coffee supply which is going to push prices down. One of these was the announcement made last week by the U.S.-based industry research group Green Coffee Association, which said U.S. stocks of unroasted coffee in August totaled to 5.56 million 60-kilogram bags. This means a 2.4% rise from July and highest level since July 2009!
Knowing the US is by far the worlds biggest consumers and its consumption/demand has huge effects on world coffee prices, I went on to the associations web site and looked at the historical US stocks. I found that when prices stocks have been very high, prices have been very low (Figure 1). I’m not implicating causality between this two variables and have not done a correlation analysis. But high stocks and low prices are often consequences of over supply. Analyzing this fact together with the prospected good Brazilian and Vietnamese harvests mentioned on last week’s blog, I still believe supply will increase, stocks everywhere will rise, and price will fall.
Having potentially lost all this money, I think I must definitely diversify and start investing in other commodities. I have bought 15 corn december contracts. Corn will most likely keep on rising in the long run do to increased demand caused by an increasing bioethanol production. Now that I’m working on biofuels in my 501 project, and although I personally think fuels made of food are a really stupid idea, I’m all about corn for this game! I’ve been studying about an increasing number of countries introducing biofuel mandates and how much this, plus projected US consumption, will increase corn based biofuel demand. I must say it all looks like in the long run prices will rise. I’m going to take my chances for the short run and go long on corn.
By the way. I found this really good picture summary of the main factors behind food prices. When trying to “predict” what will happen, or analyze what did happen with commodity prices, we must always look at this. It might be useful for your upcoming analysis.
Cheers!