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  • Volatility

     
     

    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.

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