As a follow up to Coffee Futures Part 1, we now look at what other futures products may be correlated to coffee.
Coffee futures can be traded at any time of the year, however, you want to keep a close eye on harvest seasons as well as general weather trends involving the world’s largest producers. High temperatures, floods, and droughts (among other things) can be telling signs of how coffee prices might react in the coming months.
When it comes to trading coffee (and other futures products), the thing most traders care most about is the market structure - which is the difference between the different futures months. They want to know if the market is a normal market (contango) or an inverted market (backwardation). Inverted markets may be a dangerous situation for a commodity importer or trader (it’s indicative of stress in the market).
Is Coffee Correlated With Other Products?
To find a potential trade to make using /KC (the arabica coffee futures), one of the first things we look at is its correlation with other futures products. One may assume that coffee would be correlated with other ‘softs’ products, such as sugar (/SB) or cocoa (/CC). When we look at the correlation between those products, we find that there is little to no correlation at all over the last 6 months.
A product that may be a little surprising that has a correlation with coffee is corn. It’s not as strong as some correlations that we see, but at an average of +0.6 over the years, it’s still pretty strong. We can trade this correlation using calendar spreads, which take advantage of correlation using different deferred contracts.
Strategies: N/A
Products Discussed In This Episode: /KC
*Values subject to change based on where the market is at
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