Grounds for Agreement by Talbot John M

Author:Talbot, John M. [Talbot, John M.]
Language: eng
Format: epub
ISBN: 9781461637127
Publisher: Rowman & Littlefield Publishing Group, Inc.
Published: 2013-06-24T16:00:00+00:00

Table 5.1 Total Volume of Coffee Futures Trading, New York and London, and Total World Imports of Green Coffee, 1980–1995

Source: ITC (1996), table 14, p. 72. All figures are in millions of tons of coffee.

These developments decisively shifted the balance of trading on the coffee futures exchanges, from hedgers who were involved in the coffee trade to speculators who were in it only to make a profit.17 This is demonstrated in table 5.1, which compares the volume of futures contracts traded on the New York and London exchanges to the volume of physical coffee traded on the world market. If futures contracts were being traded simply to hedge purchases of physical coffee, then total futures volume would be expected to be about two times the volume of physical coffee traded, assuming that the buyer and the seller in each purchase fully hedged their positions. Table 5.1 shows that the total volume of futures traded exploded from five times the volume of physical coffee in 1980, to nearly 10 times the volume in 1994. If options contracts, which were not traded in 1980, are added in, the total volume of futures and options traded in 1994 was the equivalent of 73.0 million tons of coffee, or almost 15 times the volume of physical coffee (ITC 1992, 1996). Thus, by the mid-1990s, the vast majority of trades made on the coffee futures markets were made for purely speculative purposes, and were not connected to sales of physical coffee.18

The shift from hedging to speculation was also accompanied by a shift in the type of speculation, from that based on fundamental analysis to that based on technical analysis. Speculators who play the coffee futures market based on fundamental analysis rely on projections of future supply and demand to forecast whether coffee prices are likely to rise or fall in the coming months, and buy or sell futures accordingly, hoping to profit when the futures prices rise or fall. Technical analysis, in contrast, attempts to predict market movements in the future solely on the basis of past market movements, independent of supply and demand conditions. Technical analysts look at the combination of moving averages of prices, trends in total volume, and trends in open interest (the total number of outstanding futures contracts at a given time), to predict whether the market is likely to move up or down. Since they rely on charts of these indicators to make their forecasts, they are often referred to as “chart” traders. The development and refinement of chart trading during the 1980s meant that many small speculators could engage in commodity speculation without knowing a great deal about the commodities they were speculating in. And while the commodity funds use both kinds of analysis, they tend to rely more heavily on charting. Since the funds are also invested in many different financial instruments, they may sometimes move capital into or out of the coffee futures markets because of their judgements of the profitably of coffee futures relative to other instruments.

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