Coffee Futures Expiration Analysis

Andy Waldock |

The expiration cycle of commodities can lead to specific peculiarities in individual markets. Recently, we’ve seen some interesting activity as the September coffee futures contract has reached maturity and new activity is generated in the December contract. Generally speaking, the commercial traders tend to control the expiration cycle of a market as each individual company determines whether it is in their best interest to take delivery, make delivery or offset their futures position and absorb the executed hedge’s profit or loss. It’s very clear that the consensus among commercial coffee traders is initially, bearish on the December contract.

Commercial traders have sold around 13,000 contracts since the middle of July. It has been more than a year since we’ve seen this type of selling pressure. In fact, they’ve been sellers in each of the last six weeks. The big picture clearly shows that commercial coffee traders have agreed that $1.80 per pound is the tethering price. They’re buyers below here and sellers above. This is much too long-term for our trading style but is important information, nonetheless.

This morning’s action is a clear technical move based on tight consolidation near the highs of the moves. Clearly, the market needs to see $2.10 before it can exhaust itself. Historically, coffee has had some violent rallies. We don’t think this will be one of them. We think the commercial selling on this chart will  cap the market somewhere between $2.10 and $2.30. This will lead to another failed breakout which should conclude with speculative long positions bailing once the market reverses. We’ve posted the commercial coffee traders versus coffee futures chart on our blog along with a few other comments regarding the seasonal divergence between the December coffee futures contract and the continuous contract coffee seasonal pattern which is also germane to the current situation.

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