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.
Figure 1
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!
Quite useful picture!! thank you!
Love the infographic Alex! Great summary of the major influences on corn prices and all a clean way to keep track of all the moving parts, I will definitely be referencing this in my future trades. I do think it is actually almost deceiving at first glance though as it looks like there are only 11 factors to consider, but when you put those factors in a global context, the possible permutations are huge! Is it even possible to have your finger on the pulse of all of these influencers in so many different countries at one time. I find the sheer volume of information a bit overwhelming! Although I guess that is why people with jobs hire portfolio managers to do this for them.
On a side note, I went short on corn this week…. ahhh, we shall see!
We shall see! I’ve been doing so bad I need a winner! haha.
I love the picture that kind of explained the factors influencing commodities future! I’m drawn to comment on your thoughts about the biofuels policy, as I’m also working on that for 501 project. I came across this news about biofuels policy that’s been circulating around lately and has been a topic for discussion. EU is capping their food crops source for biofuels from 10% to around 5-8% (still debating on the exact amount till now) by 2020 due to the concern of rising food price from reducing world food supply 🙂 So, do you still believe corn price will go up related to biofuels mandate?
Hey Bee, thanks!
I have indeed read about the proposal you mention presented by the European Commission. Its intention is to lower the biofuel policy’s impact on food prices by reducing conventional biofuel production and promoting second generation biofuels. I think it is a wonderful idea!! However, under current circumstances, I think this will not impact corn-based ethanol biofuel too much. Here is why: The EU consumes 20-25% of the world’s biofuels, but it is highly focused on biodiesel (we should remember the majority of vehicles in europe run on diesel) consuming around 70% of the global biodiesel production. When it comes to ethanol, the EU consumes only around 4% of the global output. Their reduction in ethanol consumption will be far out weighted by the projected world increase as most mandates in the world are primarily focusing on corn and sugar cane ethanol. China is introducing a 10% ethanol mandate in 9 provinces, India is going for a 5% ethanol mandate, México has already introduced a mandate in one of its main states and Indonesia has 3%-2.5% ethanol-biodiesel mandate.
I hope i’m wrong! But if all this mandates stay and grow I might not!
Here is a good link on mandates. Cheers!
http://globalrfa.org/biofuels-map/
Another awesome post Alejandro! Your analysis on the US stocks was really interesting and thanks for posting the picture summary – definitely something that will aid my decision-making in future weeks.