Medium term
Trade view / 31 October 2017 at 9:55 GMT

Arabica Coffee: Rising correction risk on record short bet

Head of Commodity Strategy / Saxo Bank
Price target: 132.5 & 138
Market price: 125
Fund short sellers in Arabica coffee have accumulated a record short position in the belief that a large 2017-18 crop may add additional pressure. There is now a growing risk, however, that funds are too short, too soon, and potentially at the wrong price given the current hesitancy from Brazilian growers to release stocks with the price approaching the lower end of their ten-year trading range. 

The managed money net-short reached a record 45,989 lots in the week to October 24, thereby eclipsing the previous record of 43,600 lots from June. Two previous short-covering rallies this year led to a 22% rally from June to August and a 10% rally during September.

Speculative positioning in Arabica Coffee
Management and risk description

This is a mean reversal trade which raises the risk of failure given the current downtrend and overall news about ample supplies and improved growing conditions in Brazil, the world's largest producer. The weight of a record short position has however helped level the playing field thereby raising the potential of a price recovery. We use the December future or CFD which expires at or just before November 20. 


Instruments: KCZ7 or COFFEENYDEC17 both quoted as cents/lb
Entry: Buy ½ position at current market price (last at 125) and ½ on a break above 128 
Stop: Sell on a stop at 122.50 
Target: 132.50 and 138 
Time horizon: Before expiry on November 20

Short term:
Short term coffee chart
 Source: Saxo Bank

Long term:
Arabica coffee, first month cont.
 Source: Saxo Bank

— Edited by Clare MacCarthy

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Logich Logich
Any idea, what triggered the significant drop in the price today, Ole S. Hansen?
Ole Hansen Ole Hansen
Trade stopped out. The sentiment has been hurt further by a combination of technical selling below 124.25 and focus on robust Vietnamese harvest
Ramug65 Ramug65
Thanks for the update
Pablo1972 Pablo1972
Even though i suffered yesterday intra-day; I am sticking with your trade idea. Mainly due to 2 compelling considerations: 1) The MM positioning is at (or close to) an all-time extreme short position; and 2) the Producer / Merchant category is very close to becoming net-long and also near an all time high --> meaning (probably) producers do not sell, and only merchants buy taking advantage of the favourable pricing. It does seem -- however -- that the worst has past, at least for now. I will keep my fingers crossed. Thanks.
peter peter
This year, coffee market is really crazy, but should move higher, sooner or later from current price.


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