Financial Industry Experts Warn Volatility Has Completely Changed The Coffee Trade – CoffeeTalk

Coffee and cocoa trading have experienced a significant shift in business models due to higher and more volatile prices. Traders have moved away from longer-term trades and are now focusing on spot trades, which are higher than futures. This has led to fewer long-term contracts and more spot deals with suppliers and clients.

Rising prices have forced traders to deposit large sums of money with exchanges to back their futures positions, making it harder to finance cargoes to move beans from production to consumption. Cocoa traders have reduced their pre-hedged positions in Ivory Coast and Ghana from 18 months to four or five months maximum. For coffee, hedges are now open for a maximum of three months.

This new way of doing business will mean less liquidity in an already lean futures market, making price moves potentially even choppier. Aggregate open interest in cocoa futures traded in New York is currently at the lowest level since 2004, while coffee’s trading activity is at a decade low.

Cocoa futures traded in New York almost tripled last year as dry weather and disease spread hurt crops in West Africa, where more than half of the global supply is sourced. Prices have dropped around 28% so far this year but remain historically high.

The bank has stepped up credit lines and offered other liquidity solutions to meet the increased need for financing cargoes that have doubled in value over the past two years. However, the market will likely stay dry for some months because buyers and sellers don’t match in terms of price.

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