Some say that the COT report is ancient history by the time we are able to study it. Of course, it is essential to compare COT activity to price movement. But for this week’s report I generally agree with the skeptics as we saw the market change from a steady but slow climb to a very volatile and aggressive market as a result of serious and unexpected frost, to drive prices to a high of 209.50, 26% higher from the COT close. Yet, the COT report has a redeeming value as we see the funds covering shorts and buying new. Eight funds covered while 16 new funds were added on the buy side. Commercials and swap dealers sold into the strength. We can safely assume that this trend continued into the three remaining days of the week. The correction from yesterday’s highs to a low of 187.20 was significant however.

There are several observations. Of course the market was weak, felt pressured, as it came off the opening levels. I would guess that the drop from the highs reversed the funds to sellers. Technically, it appears that there is a bad omen for bulls as my analytical friend mentioned, “I know we are in a weather market, so everything comes with a grain of salt. That said, technically speaking today’s candle is not one you want to see.” It is also very likely that much of the moves that we have seen is as a result of delta short covering. Those that wrote calls, and there are thousands of lots involved, were forced to cover their effective short positions. The negative side of course is that as prices retreat those hedges are no longer needed. Finally I just received notice from my clearing member that ICE is raising minimum coffee margins from $4,050 to $7,500, as of last night. Considering the long spec position, we can guess the potential impact on prices.

The COT report also shows an increase in delta and we saw the U implied volatility rise to 65% plus. It has dropped to 60% since then but it appears that the actual volatility of the last 3 days probably matches the implied. Spreads reacted to higher outright prices. The U1Z1 did not as it remained at either side of -2.90. The Z1H2 did go to -1.95 bid but any strength it showed was not convincing. It settled at -2.10. The H2Z2 was strong as origin was active, seemingly. Evidence of their presence is the posting of forward EFPs and EFSs together with outright activity. The Z2H3 was under pressure. RC seemed less interesting during the COT period as the arb closed at the high of 86.92 and on Friday it ended at 102.86. Comparing the high of both markets, we see a value of 119.10. The UX went into negative territory during the COT period and remained there afterwards.

My personal observations are obviously negative but certainly bullish factors still prevail. The possibility of frost is obvious, but dryness should be monitored as well. The discussion of how many bags were lost has begun as estimates range from 1mm bags by Rabobank to 7mm bags by our friend Orb. Periods of frost are expected to take place at the end of the month through the beginning of August. But note that a cloud covering is anticipated, providing insulation for the plants.

We have not seen market conditions like this for quite some time. Volatility makes the market treacherous but it also permits a lot of two way trading.