Ok, well… not nobody, the WSJ’s MoneyBeat blog had a recent piece saying: “Welcome to the Coffee Bust”. But for trend followers who keep their eyes peeled for the next trend that’s going to take hold, we’re wondering why so few managers have caught on to the multi-year decline in a commodity the entire world needs to function in the morning… Coffee:
Chart courtesy Finviz.com. Disclaimer: past performance is not necessarily indicative of future results.
Since its peak in 2011, coffee has dropped more than 50% percent, yet we’ve been hard pressed (pun intended) to find many trend followers who have participated. Coffee may not be the most heavily traded market, but after 2 years of decline you’d think some of them would have jumped on this trade. Some other trends have started and finished three or four times in the time this downward slope has been happening.
One CTA who has participated in the short Coffee trade is Integrated Managed Futures Corp. According to IMFC Chief Investment Officer, Roland Austrup:
“We’ve been short CSCE Arabica coffee since October 2011, and we started building a short in Liffe Robusta in early April of this year… The Coffee trade (CSCE in particular) represents a textbook trade for a long-term trend-based strategy. Coffee was very expensive in 2011 under several definitions – nominal or real price history, price relative to cost of production. Prices started braking down, any backwardation that was in place disappeared and the futures curve eventually went into contango. These are all ingredients for a potential secular long-term bear trend. And, as it turns out, the market went into surplus, one which continues to expand at present. When prices are high for a commodity and it goes into surplus, there is only one outcome … a secular bear market.
As for why so few other managers have picked up on this trend. Mr. Austrup had a few ideas:
“Coffee is a commodity that tends to exhibit very long term secular moves (including long trendless periods), but a lot of noise and gaps under shorter-term timeframes within the long-term trend. As such, I suppose it is not a market that is likely to be successfully traded under short-term time horizons. It is far too random and erratic in the short term.”
And of course the question we’re left with… if the price of coffee beans has fallen by more than half, why does my Starbucks still cost the same? Then again, they’re getting away with selling people coffee for $7 a cup now, so maybe they’ve just figured out that when it comes to the morning joe, people just aren’t that price sensitive.
Finally – for the nearly $90 million invested in the cleverly named Coffee ETF “JO” who have lost -67% over the same period – a read of our recent commodity ETF takedown may be just what the doctor ordered to kick that caffeine habit.