friedlanda

This week, my coffee stock reached an all-time low when it plummeted to -81 percent.
I was feeling rather confident that the market would bounce back, however, this never occurred. This continued decline was perpetuated by Colombia’s continued release of low(er) grade beans onto global markets which increased supply and greatly lowered the price.

While I do still believe that my stock will increase and reach positive values, it will not happen within the lifespan of this class. In any event, I have learned a great deal about futures market variability. Moreover, since studying for Jim’s exam, I feel that my knowledge of futures and offsetting risk has been strengthened and I look forward to attempting this once more with my new found knowledge.

In the meantime, I will drown my sorrows with a High-Grade, Brazilian, Americano Misto.

Aaron

Last week, I spoke of how my stock portfolio was dire. Unfortunately, not much has changed since. Coffee futures have continued to climb and fall, although the descent has dominated the trend.

This overarching downward trend has been fueled by Colombia’s continued release of beans on to global markets as well as relenting fears concerning this year’s Brazilian coffee harvest. The main Brazilian producing state, Minas Gerais, has had problems with flowering this season. Consequently, large quantities of this year’s first harvest are expected not to produce cherries due to the dryness. This will reduce the yield as these Arabica crops are known to flower and produce two harvests with the first yield always considerably larger than the second. While this scenario was meant to cause fear and increase futures prices, many professionals noted that a reduced coffee supply, even by several million bags will not have a large impact.

Things may get better for me, worse for coffee…

A few news sources, namely Agrimoney have written about the deteriorating situation of coffee plants in Brazil due to dryness. Although this year is part of the El Nino period and heavy rains were, and still are expected, this lack of rain is certainly raising fear.

Finally, coffee futures have been predicted to rise again sharply by the end of 2016 with some speculating 170 cents a pound. Let’s see what happens!

From a positive 50% portfolio return to negative 40.94% in one week, coffee stocks have proven to be one emotional roller coaster.

Coffee stocks began to depreciate late last week and by Monday, I had skipped market anxiety and found myself in despondence.

So what caused this rapid decline?

There were two primary drivers responsible for this depreciation: Unrealized Brazilian weather patterns, and most notably, Columbia’s bolstered exports.

Brazil has been faced with long term, insufficient rainfall which many investors believed would culminate in a severe drought that would further reduce supply and increase stock prices. Thus far, this drought has shown no signs of negatively impacting the coffee nor supply; which has increased confidence in this year’s crop, raised expected levels of production and reduced stock value.

Additionally, more recently, Columbia began increasing their quantity (of beans) supplied onto the world market. This increase was in response to prevailing drought conditions which threaten the current coffee crop. The infamous weather system El Nino, which is associated with Warmer weather  is expected to cause severe draught this year.  in order to ensure this year’s harvest does not go to waste measures were taken to increase Colombian exports. The national committee of coffee growers relaxed restrictions on purchases from growers to boost exports and reduce waste. Allowing this year’s harvest to reach global markets Will have far-reaching implications. Considering that as much as 18% of the current crop is of lower quality compared with a typical level of 10%. This has impacted all areas of the coffee market. Premium beans have already plunged 10% per pound which is the biggest drop since March 3. Similar rates of decline can be witnessed throughout the coffee stock.

http://www.bloomberg.com/news/articles/2015-10-16/coffee-falls-most-since-may-as-more-colombia-supplies-hit-market

So how will I cope with this unfortunate news?

Considering that my stocks have lost most of their value, I intend to wait for  this  low to pass while even purchasing a few more futures while prices are at this level. Further with hopes to ensure some of my portfolios I have begun to diversify my options. This week I purchased milk as well as orange juice stocks which have already offset some of my losses.

This week, I decided to short two additional coffee contracts. In doing some minor research, there were a variety of signs signalling that this would be a safe, potentially high yielding short term contract.

When viewing agricultural commodities on NASDAQ, coffee stood out. There was a clear downward trend (from 140 in August to 131.60 in late October) which surprised me given the current demand. I decided to further investigate to see what is guiding this trend. And while there are a multitude of trends helping to reduce this price such as: a strong growing season in Brazil, increased investment in agricultural best practise, and growing market competition helping to reduce prices as well as provide further ingenuity. I also found a great deal of evidence suggesting that prices would be on the rise in the not too distant future.

Firstly, many are concerned about Brazils lack of precipitation in the recent months. Brazilian weather in conjunction with inadequate irrigation may deplete coffee stocks this year. Additionally, as climatologist Jeffery Sachs noted, “Coffee growing will suffer a significant loss to due to climate change.” Now of course this is a long run impact but the above mentioned example of Brazil, and many other African and South American countries are suggesting similar impacts and subsequent trends.

In short, I am  confident with my investments in coffee as an agricultural commodity as various investments in the industry have helped coffee prices reach an historical low. Further, there is increased demand in coffee. China, for example, rapidly joining the market will only increase demand (at least in the short run) and global, exogenous impacts such as weather events are likely to drive up the price further.

I’ll end this post with a long run prediction:

As climate change negatively impacts coffee production in regions of higher elevation (where Arabica coffee grows), we will see increased investment in coffee plants that require lower elevation, and require fewer inputs. Consequently, Robusta coffee will come to dominate the coffee world if agricultural changes in terms of investment cost and geographic requirements are not lowered for Arabica production.

On Wednesday, while learning about the trading lab, I decided to purchase two coffee stocks. After speaking briefly with Alejandro, he suggested that coffee was at an incredibly low price and would likely only increase for the next little while. At this stage in the game, and with the minor investment, this was all of the security I needed. Today, on October 3rd, I noticed that my portfolio return had increased by 2.36% and I decided that this would be a suitable time to short.

After selling my Coffee, I decided to analyze the metal prices and decided that silver would be a secure longterm investment considering that prices are at an historical low value. I have bought 2 stocks worth of silver with plans to hold onto it for the time being.

I am still making smaller, non-risky purchases but I can see my behaviour changing as I gain confidence and understanding in the futures market. In the coming weeks, I would like to increase my portfolio’s value faster by making larger purchases that can make minor profits in the short run by playing the margin. I would also like to explore products that exhibit non-stationarity and think about the trends as mechanisms which will influence price change.

That’s all for now folks.

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