Download The COT reports consist of three different reports

COFFEE DIVISION OF ED&F MAN
July/August 2014
The Commitment of Traders (COT) reports help us assess how different market
players are positioned in the futures and options markets. The reports are released
every Friday by the Commodity Futures Trading Commission (CFTC) and are an
important tool to understanding price movements on US commodity exchanges,
including New York’s ICE Arabica contract. They allow us to see the scale of
involvement of speculators in the market, who have played a major role in the 2014
Arabica price rally and will remain a major influence in the market going forward.
Participants on commodity exchanges are either dealing with physical coffee and
are hedging price risk (categorised as commercials in the COTs), or speculating
on price direction with no interaction with the physical commodity (i.e. noncommercials). Prices are strongly linked to the non-commercial (speculator)
position as these traders can move quickly and anticipate risks and shift positions
based on fundamental outlooks. Commercial participants also attempt to anticipate
price moves but have less flexibility to shift their buying and selling patterns.
Coffee futures have seen a
marked increase in volatility this
year. Much of this is driven by the
relative trade positions held by
the speculator community on the
futures markets, versus that of
commercial producers and users.
Understanding how these traders
are positioned and how they can
drive the coffee market can assist
in anticipating risks and potential
price moves.
Keith Flury,
Head of Coffee Research
The COT reports consist of three different reports
which offer different position data and categories
of participants:
legacy report (the original report)—which classifies participants into
1— The
commercial, non-commercial and non-reportable.
report (CIT)—which breaks out the index traders from the
2— Supplemental
non-commercial and commercial categories and is useful as it splits
speculative action between passive longs and more dynamic short/
long traders.
report—which provides a split by producer/merchant/
3— Disaggregated
processor/user (that use ICE to hedge risk), managed money (funds), swap
dealers (for hedging or investment purposes), other reportables (entities not
classified by the other three categories) and non-reportables (usually small
speculators).
INSIGHT SPECIAL: UNDERSTANDING THE COMMITMENT OF TRADERS REPORTS 1
The share of open interest by trader classification is shown in the table below. The July 22, 2014 report as well as the
high, low and five-year average is shown. Currently the non-commercial long positions are higher than average, suggesting
investors believe prices will move higher. Due to the large long positions held by non-commercials the commercial short
position is also higher than average.
Table 1
COT Report Participants and Share of Open Interest*
Legacy
Supplemental
Disaggregated
July 22,
2014
High
5 year range
Low
Average
Commercial
long
short
47%
64%
55%
72%
38%
33%
47%
53%
Non-Commercial
long
short
spreading
23%
6%
27%
29%
36%
40%
10%
2%
19%
19%
14%
29%
Non-Reportable
long
short
3%
3%
8%
8%
2%
2%
5%
4%
Commercial
long
short
29%
61%
35%
71%
12%
32%
25%
51%
Non-Commercial
long
short
spreading
16%
6%
27%
24%
36%
40%
5%
2%
19%
14%
14%
29%
Non-Reportable
long
short
3%
3%
8%
8%
2%
2%
5%
4%
Index Traders
long
short
24%
3%
43%
5%
20%
0%
28%
2%
Producer/Merchant
Processor/User
long
short
25%
55%
31%
66%
11%
29%
23%
46%
Managed Money
long
short
spreading
21%
5%
9%
25%
33%
14%
9%
1%
4%
16%
12%
9%
Other-Reportable
long
short
spreading
3%
1%
18%
7%
3%
30%
0%
0%
13%
3%
2%
20%
Non-Reportable
long
short
3%
3%
8%
8%
2%
2%
5%
4%
Swap Dealers
long
short
spreading
17%
5%
5%
34%
8%
7%
12%
0%
1%
20%
3%
4%
*Futures and Options
Fig 1 The commercial net position in each report
40
20
0
-20
-40
-60
-80
-100
-120
Legacy
Source: CFTC, Volcafe
2 INSIGHT SPECIAL: UNDERSTANDING THE COMMITMENT OF TRADERS REPORTS
CIT
20
14
20
13
20
12
20
11
20
10
20
09
20
08
20
07
-140
20
06
Thousand lots
The commercial position represents the
entities along the supply chain who deal
with physical coffee. The net position
is the balance of hedging by producers
and traders holding coffee, generally
with short contracts, and hedging by
users (roasters) who would hedge using
long contracts. Fig 1 shows the three
commercial categories by report. The
net position in the legacy report is higher
than the other two reports, as it includes
the swap dealers and index traders who
have separate classification in the CIT and
disaggregated report. Currently the net
short commercial position is about a third
higher than the nine-year average, which
may suggest that a larger than normal
amount of coffee has been hedged.
Disaggregated
80
60
Thousand lots
40
0
-20
-40
Legacy
Source: CFTC, Volcafe
CIT
14
20
13
20
12
20
11
20
10
20
09
20
08
20
07
20
20
06
-60
Disaggregated
Fig 3 The index trader net position
70
300
250
60
The relationship between the
speculator position in the coffee market
and prices was clear during the rally
that occurred at the start of 2014. As
shown in fig 4, speculators had been
expecting lower prices due to ample
supply of coffee available at that time.
As weather conditions in Brazil began
to deteriorate, between Nov 2013-Feb
2014 investors bought back their short
positions - the equivalent of almost 16
mln 60kg bags of coffee. During the
same period NY Arabica futures moved
from 103.70 USc/lb to 175.65 USc/lb.
200
50
150
40
100
30
50
20
Index traders
20
20
14
13
12
20
11
20
20
10
09
20
20
08
0
Arabica Prices Usc/lb (RHS)
Fig 4 The CIT speculative net position and front month prices
80
300
60
40
200
20
150
100
-20
Arabica Prices
20
14
20
13
20
12
20
11
20
10
-60
20
09
0
20
08
-40
20
07
50
20
06
Thousand lots
250
USc/lb
The current situation shows noncommercial participants remain bullish.
As of 25 July, the CIT non-commercial
long position represents 16% of total
OI (table 1), modestly higher than the
five-year average (14%), but lower that
the five-year high of 24% (reached in
October of 2010). This suggests that
investors anticipate prices may increase
and are positioned to realize profits
in such a move. It also indicates the
potential for the speculator position to
grow on further buying yet still remain
within the recent range.
20
USc/lb
The index traders are classified only in
the supplemental CIT report and are a
combination of commercial and noncommercial traders who are generally
long and passive. They account for a
sizeable share of open interest (currently
24% of longs). Their trading position
tends to be stable in the short term,
as their stance is usually predicated
on expectations of long term bullish
returns. The traders are often less
interested in the short-term supply and
demand dynamics of the market and
more interested in the relative value of
coffee compared with other commodities
(as such, they can act as a countering
force against other speculators, as they
buy when prices are falling even when
fundamentals are bearish).
Fig 2 The non-commercial position in each report
Thousand lots
The speculator position in the reports
is generally thought of as the noncommercials category (or managed
money and non-reportables in the
disaggregated reports). Fig 2 shows
the three non-commercial categories
by report. The CIT non-commercial
position is smaller generally than the
other reports as index traders are
removed from the position. The CIT
non-commercial net position, currently
at 21.7k lots long, is 86% higher than the
nine-year average, which reflects the
bullish stance speculators hold.
Non Comm Net
If you have not received this report directly, and you would like to be added to the distribution list, please email Kona Haque at [email protected]
Disclaimer: Any comments or opinions in this report are not intended to be an offer to buy or sell commodities or futures
and options thereon as they merely state our views and carry no guarantee as to their accuracy. ©2014 VOLCAFE LTD.
INSIGHT SPECIAL: UNDERSTANDING THE COMMITMENT OF TRADERS REPORTS 3