Long Coffee / Short Sugar: Soft Commodities Pair Trade
Updated
I thought this one was pretty straightforward. Coffee looks PHENOMENAL for a long
Sugar looks yucky after the huge run-up and is a shortable soft commodity hedge
This stuff isn't that complicated. Supply issues get resolved in Sugar as they do in most commodities. Tbf I think Sugar is exhausted, I don't know if it will go down that much but I don't think it's going higher (much). I prefer to do pairs trades to reduce my overall market directional risk.
Coffee is the key here, let's look at the CoT
Speculative opinion below:
Green is the commercial (hedges). Commercials can be hedged long or short. So a coffee company like Dunkin Donuts which would buy coffee futures to hedge their future purchasing needs, or short to hedge the beans they own but haven't sold to customers yet. There were tons expiring in June, little changes in June-Sep, and now new short hedges building. This is because they've presumably obtained their desired product from producers. I've circled December on the bottom in each year. The harvest season for coffee globally *mostly* ends around November, although it is technically year round. Certainly November-April are the months where very little is being harvested. So it is this period when merchandising contracts are likely completed and short hedges become initiated now that you are sitting on the raw harvested product delivered but unsold. Those hedges will need to be built, and are being built. November - April are the most seasonally kind months because of the lack of farmed raw product available, and uncertainty about next years yields. The technical chart looks amazing, and the short hedges are getting to a point where it becomes vulnerable to positional effects pushing it higher. I like 230 or so on Coffee, which is a lot of points from 173 (current price).
Trade can be taken via futures where one coffee contract is roughly 64.5k and one sugar contract is roughly $30,000 to roughly 1:2 ratio KC:SB
Not financial advice DYOR.
Sugar looks yucky after the huge run-up and is a shortable soft commodity hedge
This stuff isn't that complicated. Supply issues get resolved in Sugar as they do in most commodities. Tbf I think Sugar is exhausted, I don't know if it will go down that much but I don't think it's going higher (much). I prefer to do pairs trades to reduce my overall market directional risk.
Coffee is the key here, let's look at the CoT
Speculative opinion below:
Green is the commercial (hedges). Commercials can be hedged long or short. So a coffee company like Dunkin Donuts which would buy coffee futures to hedge their future purchasing needs, or short to hedge the beans they own but haven't sold to customers yet. There were tons expiring in June, little changes in June-Sep, and now new short hedges building. This is because they've presumably obtained their desired product from producers. I've circled December on the bottom in each year. The harvest season for coffee globally *mostly* ends around November, although it is technically year round. Certainly November-April are the months where very little is being harvested. So it is this period when merchandising contracts are likely completed and short hedges become initiated now that you are sitting on the raw harvested product delivered but unsold. Those hedges will need to be built, and are being built. November - April are the most seasonally kind months because of the lack of farmed raw product available, and uncertainty about next years yields. The technical chart looks amazing, and the short hedges are getting to a point where it becomes vulnerable to positional effects pushing it higher. I like 230 or so on Coffee, which is a lot of points from 173 (current price).
Trade can be taken via futures where one coffee contract is roughly 64.5k and one sugar contract is roughly $30,000 to roughly 1:2 ratio KC:SB
Not financial advice DYOR.
Trade closed: target reached
Target hit, trade closed. Casual 41% spread trade in roughly 2 weeks.
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