Commodity futures are known to exhibit a fair amount of volatility, but there is perhaps no group of assets more volatile than the softs. Soft commodities, which consist of cocoa, coffee, cotton, and sugar, are known for their large daily movements, as it is not uncommon to watch these contracts jump by 3% in a single trading session. As such, they make for extremely lucrative trading opportunities, despite their high risks. So it comes as no surprise that a number of investors actively trade these four commodities in hopes of turning big gains. It is also important to note that all four of these have very different price drivers, so while an asset like cotton has enjoyed a strong 2012, coffee has done just the opposite [see also Five Commodity MLPs With Sky High Yields].
Since hitting a high in September of last year, coffee prices have dropped almost 30% with only minor upward spikes along the way. As far as 2012 is concerned, coffee has certainly had a hard time, but the last week has been especially bad. Over the trailing five days, coffee futures have lost more than 8%, creating a unique opportunity for traders looking for possible mispriced assets. With coffee futures in the gutter, there are two ways to look at this commodity from a trading perspective. The first is that coffee is on a slippery slope and establishing a short position can help you take advantage of that pattern. The second is that these prices may be well undervalued and an opportunity to buy in low and sell high [see also 50 Ways To Invest In Agriculture].
Ways To Play
For investors looking to make a play on this developing commodity trend, there are a number of options available. The most direct method is to establish exposure to coffee futures contracts, with the current May contract supporting the most volume, via the NYMEX. But not everyone is savvy to futures markets as they can be quite complex and difficult to understand. In that case, the Dow Jones-UBS Coffee ETN (JO), offers exposure to front month futures contracts for coffee and will give investors a more indirect way to play these futures. And finally, investors can take a more indirect approach with stocks like Monsanto (MON) who’s profits do not depend solely on coffee, but certainly rely a great deal on this soft commodity [see also The Ultimate Guide To Coffee Investing].
Disclosure: No positions at time of writing.