Coffee: The Phrase that Doesn't Always Pay

• If we had a drinking game for every time the phrase “tight supplies” was written or said by commodity commentators, trading days would be far more interesting. 
• Just because a market posts a one day rally doesn't necessarily mean its supply suddenly tightened. Real market fundamentals don't normally work that way. 
• Coffee is a great example, with the solid carry in its forward curve pulling the rug out from under the constant drone of “tight supply” commentary. 

As you glance through commentary of the Commodity Sector, regardless of media platform, you’ll likely notice one of the most popular phrases these days is “tight supplies”. It’s always interesting when the industry, again talking about commodity commentators, find the phrase of the hour and use it wherever and whenever it can, even if it doesn’t fit with what’s actually happening in the market. After all, why get bogged down in the reality of actual supply and demand. 

Now, before everyone starts coming after me with pitchforks and torches, there are indeed some markets that have seen tight supplies at a time of exploding demand. The incredible rally in lumber (LSX21) from April 2020 through May 2021 is a solid example, with the market’s then inverted forward curve a good indicator of just how tight supplies were. Lean hogs (HEV21) also skyrocketed from April 2020 through June 2021, this time with futures spreads confirming what a friend in the industry had tipped me off about given hog farm feed truck drivers had a lot of idle time. Most recently, we’ve seen natural gas (NGX21) explode as Europe faced an energy crisis, all while President Putin of Russia, the world’s largest supplier, sat back and grinned. Here it’s interesting to note futures spreads are not inverted, reflecting more the supply and demand situation in the US rather than the world. 

As for markets that don’t live up to the billing, one that stands out of late is coffee (KCZ21). One day the headlines are screaming “Coffee Rallies on Tight Supply Concerns”, failing to mention the same market collapsed the day before. Given coffee is another storable ag commodity, we can easily read if it is fundamentally bullish by looking at the market’s forward curve. The solid carry/contango from the December 2021 contract ($2.0270) through the December 2022 issue ($2.0750) tells us that no, the market is not like so many others and facing a tight supply situation.