Coffee hasn’t been this cheap since June of 2010, says Andy Waldock of Commodity & Derivative Advisors, which could suggest that a bottom may be forming.

The coffee market is what you’d call a professional traders’ market. It is a large and volatile contract, which leads to equity swings that are too large, even with a single contract for small traders to withstand. Furthermore, commercial traders dominate the market through their access to global information and deep pockets. The coffee futures market has been in decline since May of last year, losing half its value from the $3.08 per pound high. Even with the decline in volatility as the market has collapsed the average daily range over the last month is still nearly $.04 per pound, which equals an average cash account fluctuation of $1,500 per day, per contract. Those wishing to participate in the coffee market without the use of leverage may want to look at the iPath DJ-UBS Coffee Subindex Total Return ETN (JO).

The May highs are a good place to start looking at the commercial traders’ forecasting ability in this market. The International Commodity Exchange in New York, formerly the New York Board of Trade, held 1.6 million bags of coffee in their warehouses when the market made its high last year. Commercial traders sold into this rally and accumulated a net short position of more than 38,000 contracts. As you might expect, this left small and large speculators with their largest position of the rally, right at the top.

The next piece to look at is the Commitment of Traders Index. This is the most common tool used to measure the participation of the primary market participants; commercial traders, large speculators, and small speculators. The index normalizes the total position to a 0-100 scale. Zero is the most bearish and 100 is the most bullish while crosses above 70 and below 30 indicate overbought and oversold levels and sets traders up with a trigger mechanism. This tool would have been of little use as the market declined since the index has been stuck above 70 for commercial traders since late September of last year as the commercial traders began buying to cover their short positions initiated last May.

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