Those of us who have been following coffee for a while have a vivid memory of how spreads were trading the last few years. We are seeing a completely different situation right now. What’s changed and what does it mean?
Spreads play a much bigger role than just reflecting the warehouse situation. They also speak to the pipeline and commercial activities. 1.2 mln warehouse stocks cannot dictate carrying charges for a 160 mln bag market. Why are spreads almost inverted?
Cash prices according to the ICO last report are around the $1.75 level for Arabica out of Central America or Colombia therefore they are trading at a huge premium to NY futures
For which they are the deliverable quality. At the rate stocks are dropping all things being equal December will have to trade at 1.75 to compete with commercial buyers.
Example 1 commercial buys Honduran coffee,a futures contract is a very bad hedge. No carry and a huge discount to the physical. Commercial should be very hesitant to buy coffee without a buyer and producer should be very eager to sell coffee. Why is this not happening?
Example 2 Starbucks want to increase purchases a year out. Very cheap to do so buy futures 12 months out very small premium. In fact a huge discount to the cash prices trading today. 12 months out cash prices collapse to futures price or no warehouse stocks and futures prices have risen to cash price.
Example 3 Suppose for a moment there is a technical situation with cash prices pre Central America harvest that will be resolved in time. Too much coffee will be available combined with large Brazilian availabilities than the March 21 spreads forward would be much wider, similar to historical levels as commercials would sell those spreads. Futures markets are forward looking, this is not happening. Remember spreads are the domain of commercials, speculators play a very small role, speculator accumulation doesn’t impact spreads. Is the market making a major mistake or trying to tell us something?
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