Tags: commodity | speculators | coffee | stock

Futures Markets Predicting Drop in Food Prices

By    |   Wednesday, 16 Apr 2014 07:41 AM

Many analysts focus on price action to understand markets. They try forecasting the future by identifying trends in prices. In some markets, this approach ignores some of the most valuable information markets offer.

Regulators require market participants in futures markets to reveal their positions every week. Analyzing this data allows us to gain insights into what large investors are actually doing with their money.

Commercial speculators use futures markets to hedge their risks. A large coffee retailer, for example, could use futures contracts to lock in a price for coffee and would qualify as a commercial in that market. With the right trades in place, the coffee retailer would know exactly how much coffee beans will cost them for the next year. This strategy can help steady profits, or even increase profits if the firm's traders can stay ahead of the market.

In any market, the commercial speculators usually know the factors affecting supply and demand better than anyone else does. Shifts in their positions can provide important information about the markets.

Coffee has gained more than 60 percent since the beginning of the year, while commercial speculators have been selling. Hedge funds and individual speculators, less-informed market participants, have been buying.

Corn, soybeans, orange juice and wheat all show double-digit gains with commercial speculators selling to non-commercial speculators.

Commercial speculators sell when they believe prices are high, and they buy when prices are low. Individual investors tend to rush into futures markets after prices have moved up and set for a decline.

Current market trends indicate commodities are rising because of poor weather in regions where the crops are grown, but commercial speculators expect prices to fall later this year.

From an inter-market perspective, lower commodity prices would ease inflation concerns, allowing the Federal Reserve to keep interest rates low. Fed easing has helped push stock prices up and, indirectly, lower commodity prices indicate the bull market in stocks could continue.

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MichaelCarr
Many analysts focus on price action to understand markets. They try forecasting the future by identifying trends in prices. In some markets, this approach ignores some of the most valuable information markets offer.
commodity, speculators, coffee, stock
322
2014-41-16
Wednesday, 16 Apr 2014 07:41 AM
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