Q&A
Futures For You
Inside The Futures World
Want to find out how the futures markets really work?
DeCarley Trading senior analyst and broker Carley Garner responds to your questions
about today’s futures markets. To submit a question, post your question
at https://Message-Boards.Traders.com. Answers will be posted there, and selected questions will appear in a future issue of S&C. Visit Garner at www.DeCarleyTrading.com. Her books, Commodity Options and A Trader’s First Book On Commodities, are available from FT Press.
ABOUT THE SOFTS
Where can I find fundamental information on the softs futures markets?
The soft commodities were made famous by the 1980s movie Trading Places, but many novice commodity traders find it difficult to find fundamental research about the complex. The challenge lies primarily in the fact that the softs are typically grown, cultivated, and harvested abroad, and thus, often there isn’t conveniently released data on production and demand statistics. This is unlike other commodities such as the grains and meats, in which the Usda reports weekly and monthly updates on such figures.
If you aren’t familiar with the softs, they are the food and fiber complex consisting of cotton, cocoa, sugar, orange juice, and coffee. In addition to the dearth of statistical data available on this topic, the figures that are available may be less reliable because production primarily takes place in countries that are less technologically advanced and with looser regulation relative to the US. As a result, it isn’t uncommon for this group of futures contracts to experience extreme and sometimes unexplained moves. Coffee prices soared in the second-quarter of 2010 to levels only seen a handful of times in recent decades. However, the move was made without news of a freeze or other obstruction in supply, let alone any substantial changes in demand.
Accessing soft market information, let alone reliable supply and demand figures, can be time consuming, but here are a few resources that will help you stay on top of the latest fundamental developments:
International Coffee Organization. A popular source of fundamental coffee news is the International Coffee Organization (Ico). The Ico is an intergovernmental union for coffee whose goal is to promote the consumption, quality, and efficiency of the world coffee economy. Traders might find the organization helpful in that it compiles historical stats and data regarding coffee fundamentals and pricing. Conveniently, the Ico offers export stats and prices dating as far back as the 1960s on its website at www.ICO.org.
Brazilian Government Conab. Conab, Brazil’s crop forecasting agency, has become a popular source of Brazilian coffee supply and production stats despite their mission statement: “To contribute to the regularity of supply and guarantee income to farmers, participating in the formulation and implementation of policies and agricultural supply.” Some would argue that there is a conflict of interest between reporting statistics and “guaranteeing” income to farmers.
Visitors to www.Conab.gov.br/ will find the latest news and statistics on the Brazilian coffee industry. Keep in mind that it may take some work on your part; because it is a Brazilian website, you will either need to be fluent in Portuguese or use a browser capable of translating.
Usda. Luckily, the Usda compiles periodic fundamental data on sugar, coffee and orange juice. Although the US government might not be perfect in collecting and reporting data, it is assumed that the Usda is superior to most other commodity reporting organizations. Unfortunately, the Usda reports on the softs much less frequently than it does on grains or meats.
Sugar World Production Supply And Distribution. The Usda releases a report on the world supply of sugar twice a year, in May and November. Included are estimates of production, consumption, and ending stocks. Its May 2009 report estimated the ending stocks to use ratio would be at 19%, its lowest level in 16 years, which triggered the historic rally to the mid-$0.20 range during 2010. (The stocks-to-use ratio is derived by dividing ending stocks [supply] of a particular commodity by the total demand.)
To enhance the utility of the information, the Usda breaks down the fundamental picture for Brazil, India, Thailand, and China, the largest sugar producers, and comments on projected ethanol demand. Because this is a semiannual report, traders are often starved for information prior to the release of the data.
Coffee World Markets And Trade. The Usda also issues a semiannual report on coffee supply and demand statistics. The World Markets And Trade report is released every June and December and offers information such as world production and export estimates broken down by country.
For access to the Foreign Agricultural Service (Fas) division of the Usda and each of these reports, visit www.fas.usda.gov/.
MORE ABOUT THE SOFTS
Aside from informational challenges, there are other obstacles to trading markets such as orange juice, sugar, and coffee — obstacles such as liquidity, explosions in volatility, and relatively high leverage. But you shouldn’t let these factors prevent you from participating. Instead, you should ensure that your trading strategy is appropriate for the market you are trading.
For instance, orange juice futures typically trade between 1,000 and 2,000 contracts in a single session. This is low compared to most futures markets, and therefore, OJ traders would want to avoid strategies such as daytrading or option selling that require ample liquidity. Similarly, sugar futures are liquid but can sometimes experience sharp bouts of volatility after prolonged inaction. Synthetic trading can be useful, so that positions taken are partially or fully hedged using long options.
In contrast, coffee futures can be a great way for patient option sellers to capitalize on massive increases in premium during weather scares or other market-moving events. That said, the risks of option selling in such situations can be high, so it is imperative that traders wait for opportunities based on historical standards as opposed to simply selling premium.