Seasonal tendencies: Beans, cocoa & coffee

August 29, 2017 04:35 PM

We’ve  spent a lot of time deciphering the age-old chicken and egg adage as it relates to trader behavior and seasonality. Is seasonality driving traders’ decisions or does the anticipation of a seasonal tendency become a self-fulfilling prophecy? 

We mentioned the soybean decline last month noting that it had begun to attract processor buying, which pushed the net commercial trader position to a bullish record and is now above the 130,000 level mentioned last month. Commercial traders are value players. Soybeans are the cheapest they’ve been in more than a year, and bean processors are taking advantage of this opportunity ahead of any late summer weather concerns.

Conversely, this places the speculators on the side of pressing a falling market lower. They just set a record net short position. There is plenty of money to be made on the short side of commodity markets, but betting against the commercial traders at market extremes is typically a fool’s errand. 

Speculators are currently short 1.7 contracts for every contract they’re long as November beans test the $9 per bushel level. Whether the speculators are trend-following or short-selling ahead of anticipated late summer weakness, the odds suggest a good portion of them will take losses on a short covering rally before the market falls through $9 later this summer. After all, these are the same traders that set a net long record at last June’s high.

The cocoa market is exhibiting similar behavior as the speculators set a net short record position ahead of cocoa’s late September seasonal weakness. Speculators may be overanxious. December cocoa is well supported at $1,800 per metric ton as grinders step up to lock in supplies. Grinder support coupled with an extremely oversold speculative trader position leaves this market ripe for a short covering rally and test of resistance at $2,125 in the December contract. This rally may be sold ahead of the seasonal weakness, but long-term traders will want to focus on any decline below $1,800 as a buying opportunity. The long-term fundamentals support a nearby price floor.

While cocoa has yet to bottom, coffee may have already made its low for the December contract near $1.19 per pound. Coffee has been in a multi-year decline, but coffee grinders have never bought this aggressively. They just passed their previous net long record established in November of 2013. That episode saw the market run from $1.55 to $2.58 in just four weeks. We aren’t suggesting that there’s a one-month run worth more than $30,000 per contract, but pay attention for reversal signals. They can develop quickly. 

About the Author

Andy Waldock, owner of the brokerage firm Commodity & Derivative Advisors and the subscription service, is a third generation commodity trader with over 25 years of experience on all of the main U.S. exchanges. Andy stays abreast of modern programming developments due to the trading programs he employs for his own account and managed money.  He can be reached at