The principle of seasonality in commodities trading is one of the most overlooked, and in my opinion most important factors in trading successfully. When trading certain commodities, coffee futures for example, seasonality should be observed religiously if one is to avoid devastating losses or maximize gains. So what is Seasonality, and how does it affect commodities futures prices?
Seasonality is the tendency for commodities futures prices to rise or fall at a particular time of year, every year. In many agricultural commodities, seasonality is a result of harvest cycles. Prices fall when supply becomes abundant, and they rise when supply dwindles. In other commodities like gold or crude oil where supply tends to be steadier, barring any natural disasters, seasonality is determined by changes in seasonal demand patterns. For example, crude prices tend to rise in the spring ahead of the summer driving season, and again near the end of the summer to factor in the winter heating season. A ten year study of most commodities corroborates this phenomenon, and seasonal price tendencies ought to be respected more often than not.
Now that we know what seasonality is, let's discuss its relevancy to coffee futures for this spring. Coffee has some of the strongest seasonal tendencies among all tradable commodities. The most dramatic seasonal pattern occurs in June, where prices tend to collapse under the weight of the Brazilian harvest coming online. Because there are only a few major players making up the majority of coffee production in the world, their production cycles heavily influence prices. Brazil in the summer months, and Vietnam toward the end of the year, both contribute massive quantities of fresh coffee. This is a burden that tends to weight heavily on futures prices. But in recent years, due to steadily climbing worldwide demand, and due to the fact that the growth in worldwide supply has not kept pace with consumption, seasonal influences have become more pronounced. Every year since 2004 we have seen prices trend higher from October through March of the following year, while trending lower in the summer months.
Now lets add to this seasonal tendency for coffee futures prices to climb in the spring the fact that we're on the cusp of a huge deficit in coffee product for the 2009-2010 season, the fact that coffee stocks (reserves) at producing locations are at an all time low, and that worldwide reserves relative to consumption are at levels not seen in thirty years. This is the perfect storm for coffee futures, and is going to result in the largest bull run in recorded history. But some of these factors are not new, why have prices not begun climbing as of yet? Well friends, back to the title of our article. Seasonality. 2008 was a generous year coffee production, adding a good deal to stocks. That and the global financial crisis pulled money from every asset class out there. So we've been riding off of an excess of supply at a time when people are afraid to invest. I believe the catalyst for this market is just around the corner. The pricing in of the coming coffee deficit will begin any time now as we've cleared the Vietnamese and Colombian crops and have just a few months before Brazil harvests a cyclically smaller crop. Seasonality suggests the time is here for coffee to price in this deficit. So contact your commodities broker and go long, or buy yourself into a Coffee ETF and hang tight, cause we're about to see a bull run to remember.
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