3626 views June 9, 2017 posted by Maja Wallengren

SPECIAL REPORT: Are Speculators ‘Crushing’ Our Coffee Growers?


Coffee growers across the world’s producing countries are increasingly in pain over the continuing low prices, prices which for the vast majority of growers are below the cost of production. This is nothing new, but this situation has — with very few exemptions — persisted for most of the past 17 years. Arabica coffee prices are today EXACTLY the same as they were in the early 1970s, a stunning 45 years have gone by without any rise or adjustment to consumer inflation, let alone much sharper rises in the price of fuel and fertilizer, two major component in the cost of growing coffee. During this same period the socio-economic issues at stake in coffee producing countries have resulted in the average size of land unit per family has dwindled to between 0.5 and 0.8 hectare for the VAST MAJORITY of the world’s estimated 200 million coffee producing families, who depend on coffee for their full or partial daily survival. In this great read by Andres Agredo, a Colombian commodity trader from Medellin, he rises the question about whether the speculative nature of the coffee market is “crushing our coffee farmers” and explain some of the many issues at stake. This is a subject that SpillingTheBeans has reported on for years and we welcome the opportunity to bring more attention to this increasingly difficult side of the equation that coffee growers have to deal with on a daily basis. Agredo’s commentary was first published on the online financial forum Seekingalpha.com on June 9, 2017.

Are Speculators ‘Crushing’ Our Coffee Growers?

BY ANDRES AGREDO, for Seekingalpha.com

JUN 9, 2017 (Seekingalpha.com)–Physical coffee market fundamentals are counting less and less for futures markets. We need to develop politics to protect coffee growers’ interests against those of short-term speculators. As a financial trader, I can be right on fundamentals, but be crushed if I’m not also right on price.

“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 means coffee growers often find themselves selling their hard worked final product at prices as much as 30% lower than they were 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.

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??

Read the article in full here: https://seekingalpha.com/article/4080242-speculators-crushing-coffee-growers?

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 precise 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 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!

Read the article in full here: https://seekingalpha.com/article/4080242-speculators-crushing-coffee-growers?


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