The extreme volatility of coffee prices can be seen
historically in both the size and suddenness of price moves. In April 1994, for
example, New York arabica 'C' contracts were around 85 cts/lb - after frost
damage in Brazil they reached 248 cts/lb: a rise of close to 300% in less than
three months. Eventually values fell back to around 90 cts/lb, but by May 1997
prices had reached over 300 cts/lb. And by mid 2001 the nearest position on the
New York arabica 'C' contract had fallen to below 50 cts/lb: a 30-year low just
four years after the 1997 highs. By end 2005 the near position once again stood
above 100 cts/lb.
www.futures.tradingcharts.com/chart/CF/M shows the
price movements over the last nine years.
Modern communications can move markets quickly,
ensuring that all events affecting price become known to all market players more
or less simultaneously. And when as a result everyone wants to buy or sell but
there are no sellers or buyers, then without any trading the price may jump or
fall by as much as 10 cts/lb or more, depending on the starting price level. In
times of extreme volatility this gap means a trader can be left with a position
they cannot liquidate when they wish to because there is no trade.
It is also critical to understand that the hours of
trading futures are arbitrary and restricted, while activity in the cash market
continues around the clock. Events that occur after trading hours can translate
into a big gap in price from the previous day's closing to the next day's
opening.