Spread Edge Capital specializes in seasonal spread trading across a wide variety of commodity markets. A spread trade is the simultaneous purchase and sale of the same commodity with different delivery dates.  SpreadEdge publishes a weekly Newsletter that provides several seasonal spread trade opportunities every week.

Overview

Each week the SpreadEdge Newsletter documents an extensive list of seasonal, technical and fundamental indicators for the various commodity markets.  This week I will focus on the Soft markets and review the % carry yield, hedge fund position estimates, relative price and positioning, and the daily charts for Coffee and Sugar.  Each of these indicators will be reviewed in the following sections.

% Carry Yield

Futures calendar curves vary in shape over time. Some often invert, with front-month contract prices exceeding those of later contracts, resulting in positive carry. Conversely, some curves exhibit contango, leading to a negative carry.  % Carry yield is the one-year calendar curve yield as a percentage of contract notional value.  Markets tend to reverse when they get at or near their highest or lowest levels over the past 52 weeks.

• Sugar, Arabica Coffee and Robusta Coffee are all very near their highest carry yield for the past 52 weeks.
   

• Coffee had a carry yield of 6.0% as of the close on Tuesday.  This is just (0.1%) from the high in early July.
• The carry yield on Sugar has more than doubled in the past few weeks.  Tuesday's carry yield of 12.7% is down (0.5%) from the high yield of the year of 13.2% the previous week.

Hedge Fund Position Estimates

The Commitment of Traders (COT) report, issued by the Commodity Futures Trading Commission (CFTC), offers a weekly snapshot of the positions taken by different market participants in the U.S. futures markets. Published every Friday at 3:30 PM Eastern Time, the COT report reflects positions held as of the previous Tuesday's closing business hours.  Peak Trading Research assesses the latest COT report, examining alterations in price and open interest to provide an appraisal of net fund positioning daily.

• For the first time in several weeks, no Soft market is at or near their highest hedge fund position estimate for the past year.

• Hedge funds have maintained a net long position in Coffee in the upper 50,000's to lower 60,000's for the past several weeks.  This is off the high of 75,883 from April.
• Hedge funds have added over 137,000 net long contracts in the past few weeks.  However, this is barely half the high position estimates from this time last year.

Relative Price and Positioning

Relative Positioning – Oversold versus Overbought on the horizontal axis.  COT current net position compared to the COT data over the past 24 months.
Relative Price - Cheap versus Expensive on the vertical axis.  A comparison of the front month current price compared to the front month price over the past 24 months.  
 

• Arabica Coffee continues to be the most “Expensive and Overbought” market within the agriculture complex.
• Sugar, despite the recent move higher, is still in the “Cheap and Oversold” quadrant.

Technical Analysis

• Coffee looks to be ready to challenge the bottom of the upward channel after dropping the past 3 trading days.
• Sugar has been digesting the gains from September and could be ready for another move higher.

To Trade This

I'm looking to open a short Coffee calendar spread early next week that would benefit from a continued move lower in the Coffee market.  Seasonality is favorable for the trade. 

Seasonality for Sugar is not particularly strong at this time, so I do not see an edge in this market.

More Information

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The SpreadEdge Weekly Newsletter is published every weekend and provides a broad overview of the important seasonal, technical, and fundamental indicators within the Energy, Grains, Meats, Softs, Metals and Currency markets.  In addition, spread trade recommendations and follow-up on open trades is also provided.  For a free copy of the Weekly Newsletter, please send an email to info@SpreadEdgeCapital.com

Darren Carlat

SpreadEdge Capital, LLC

(214) 636-3133

Darren@SpreadEdgeCapital.com

www.SpreadEdgeCapital.com

Disclaimer

SpreadEdge Capital, LLC is registered as a Commodity Trading Advisor with the Commodity Futures Trading Commission and is an NFA member. Past performance is not indicative of future results. Futures trading is not suitable for all investors, The risk associated with futures trading is substantial. Only risk capital should be used for these investments because you can lose more than your original investment. This is not a solicitation.