At present I have three spreads for May 09 Coffee.
Short 1 $1.15 call and long 3 $1.40 calls
Short 2 $1.20 calls and long 4 $1.40 calls.

 
I was also able to trade out of 4 of my 6 initial May $1.70 calls and put some of that equity toward an additional May 09 $1.40 call giving me a ratio of Short 3 calls around $1.20 to Long 8 at $1.40. This, assuming the market turns up in the next few months will give me a net long position of five contracts somewhere in the $1.50 range, and a net liability of 3 contracts should futures prices settle in the $1.15 to $1.40 range.

As such, I believe I’ve taken on enough risk with these spreads, and will try to work the remaining $1.70 calls into a better position. For example, on a bounce to $1.25 or so, I may sell both of those and perhaps one of the $1.40 calls to use on a chance pullback to buy back some of my short puts. The overall trend in this market is still down and as such demands respect on the downside. But I do believe we’ve seen the bottom already at $1.05, and that this market is in the process of establishing a base. Furthermore, if I had to place an intermediate term bottom on the Dow, I’d bet on today’s reversal in prices accompanied by both MACD Histogram and RSI bullish divergence.

Both the MACD Histogram and the Relative Strength Index gave bullish divergence buy signals today. Both have, on the whole, been very accurate over the last several years in indicating long term tops and bottoms. Both of these also flashed bullish divergence in the $1.35 area and were proved false by plummeting prices. Why should I trust them now you might ask? What is different today than a month and a half ago?

For starters, no one is in this market. Volume has been incredibly thin recently, a result no doubt of low open interest (the number of open contracts in the market). In order to have persistent selling, you typically need a large number of bulls who have yet to give up hope in a surge of selling. I argue that we’ve seen that capitulation already. If not in terms of extreme volatility, than in terms of both camps fleeing positions, meaning bulls have given up hope and bears are unwilling to add to short positions, seeing the danger in low prices and having made their profits.

This, in my opinion is very bullish. This market is exhausted, frustrated, and nervous. And in spite of it, Commercials have taken a strong stance on the long side. Again, not to sound like a broken record, Commercials have successfully picked and/or created every long term bottom in this market for the last 8 years, evidenced by their net long position at those times. And again I ask, who, if anyone, ought to know the long term relative value of a commodity if not those who actually need to deal in the physical product? Those in the know are telling us loud and clear that coffee is cheap.

The later into the season we get, the more pressure there is on this market to anticipate coming shortfalls. October through May is typically a very bullish time period, as the Brazilian harvest finished and the Vietnam harvest is currently underway. The peak of supply typically coincides with price bottoms in October through December. And while we should have learned our lesson already about picking bottoms, I still try to apply the principle of buying low and selling high (as determined by commercial positions and technical indicators).

The end of last week and the start of this one I’ve managed to add two spreads to my account:

1. Sold 1 $1.20 call and bought 2 $1.40 calls
2. Sold 1 $1.30 call and bought 3 $1.40 calls

I’m going to try to add one more spread to this ratio, giving me a net long position of 4 or 5 contracts which will begin to show a profit in the $1.40 to $1.50 price range and up. As I mentioned before, I’ll use rallies to liquidate my worthless Dec. $1.30 calls of which I still have 4, and perhaps a few of my May $1.70 calls, which are not serving much of a purpose at these prices. On price declines I’ll attempt to buy back my short call positions, thereby increasing my ratio of long calls to short, and consequently my leverage and earning potential.

But what can a hobo do with a mere 2.5 grand in cash, and another 4 in contracts nobody else currently wants because they’re so far out of the money? Well, a hobo does what a hobo do, he figures shit out. He buckles down and rummages through his hobo bag, looking for any and every devise conducive to survival. If his foe was a landlord he’d use the ol point and run, if a drunken Irishman he’d head butt and bite, if a garrulous nuisance of a hobo, alas, the knife. But when fighting the intangible one has to use more specious devices, those created by evil financiers to fleece the ignorant masses of their hard earned dollars. One has to use money knowledge. But again you ask, “What can a hobo do with a mere 2.5 grand in cash, another 4 in worthless out of the money options?” He lowers his head soberly. Nothing my friends. Nothing. I haven’t the tools with what I’ve got. Not enough to make back the 60 grand I’ve borrowed and lost, and not enough to make a little something extra to live on. But I do have the tools with what I don’t got!

Pop quiz. Where do options come from (points to nerd in front row)? We know I bought a bunch of em, but who is the smart ass on the other side of my trade? Doesn’t matter, he’ll get his in due time. What does matters is I too can be that smart ass. Just as one can buy an option, one can write, or sell an option. This is not a recommended approach toward trading because if buying an option awards you limited risk and unlimited earning potential then writing an option does the opposite, awarding you with unlimited risk and limited earning potential. Earning potential is limited to the cost of the option in fact, and on top of that one needs to keep a good deal of capital handy on margin to cover it. Ok, so it’s dangerous and risky, accepted. But will it allow us any maneuvering we couldn’t have otherwise. I think so.

You see my biggest problem right now is and has been time decay on my December contracts, and illiquidity on my May contracts. So if I wanted to increase my trading size at these attractive prices I’d need to sell, which I can’t, unless of course I sell what I don’t have. This, like I said, is normally very risky. But I can not only allay some of that risk, I can also increase my position by using the premium from contracts I sell to by a greater number of cheaper out-of-the-money options for the same price. This will have an offsetting break even effect for several months and cost me nothing. The risk of this I’ll go into later on the chance this fails and I have nothing else to do but explain my stupidity. But should this succeed I’ll have a temporary liability that is covered by two or more assets should prices rise sharply. Should prices continue to fall and remain down, I loose nothing, as the contract I wrote expires worthless, and the options I purchased were paid for by the premium received from said written one. If prices come to rest between my strike prices after 3 months or so I’ll be hurting something awful, liable then for the difference in value. The technical name for this maneuver is called a call ratio back spread. But we’ll just refer to it as the hail marry play.

A couple days ago I put on one spread, selling a May of 09 $1.20 call, and using that premium to buy two May 09 $1.40 calls for a dead even exchange costing me nothing…now. I intend to put on another as soon as the market allows. If the market falls ten cents, I’ll buy back one of the $1.20 calls I wrote at a cheaper price, improving my ratio to [short one $1.20 call and long four $1.40 calls]. Should the market rise a dime or so I’ll use the bounce to liquidate my December $1.30 calls and perhaps some May $1.70 calls on a scale up. And after, using that cash to buy back some of the puts I’ve written on the next pullback in prices. This strategy should allow me to re-establish a position with a lot more time, as well as allow me to take advantage of short term volatility and uncertainty. Hope is still alive, though flogged mercilessly.

Current Position:
Long: 4 Dec. $1.30 calls, 6 May $1.70 calls, 2 May $1.40 calls (just added via the spread)
Short: 1 May $1.20 call (just sold via the spread)

Reasons for Skepticism
Let me start by saying that this decline, while damaging to the short and intermediate term technical picture, is a very bullish long term development, expounded in the section below. My skepticism is time based only, as my call option contracts are set to expire November 11th. A recovery in prices of 15 to 25 cents in thirty days is possible, but not likely given the current financial crisis. Coffee has been beaten down terribly with the rest of the commodities complex and may continue to trade on fear rather than on fundamentals over the intermediate term. While I don’t believe this will continue to be the case, I can’t rule it out. Furthermore, at present there is no real lack of supply.

Reasons for Hope
1. Coffee is currently 20 cents below the cost of production.
2. Coffee has fallen to and held at $1.15, which happens to be a perfect retracement to the long term trend line, connecting lows each year from 2005 to present.
3. Seasonality is exceedingly bullish October through December, and remains strong through May.
4. Commercials have finally finally finally gone long this market. The last indicator I was unwilling to wait for two months ago before buying in. Commercial traders have picked and/or caused every long term bottom in coffee over the last 5 years, and each of those lows was followed by a strong rally taking prices 30 to 70 cents higher depending on the year.
5. Friday, October 10th 08, all commodities fell sharply, the dollar rallied sharply, and coffee miraculously closed up on the day after opening 4 cents down. It showed remarkable strength amidst complete chaos and deterioration all around it.
6. Depressed prices translates to decreased investment translates to cutbacks in crop care, hired help, and eventually production.
7. I expect coffee to show surprising resilience to the looming recession. Where copper and cotton may have a sharp contraction in demand; coffee may experience an increase for three reasons:
          1. Coffee drinkers will shift from more expensive coffee house specialty drinks to basic black they can brew at home for a tenth of the price. In so doing more coffee will be washed down the sink than occurs using the more efficient methods of coffee houses.
          2. Coffee is less a discretionary expense than a staple, and its use benefits from stress and hard work, both of which are occurring in copious amounts at present, induced by fear of financial ruin or lack of security. Coffee drinkers are like smokers and alcoholics, relying on caffeine in good times and bad to make it through the day.
          3. It’s very cheap.

Just so people don’t take me for a reckless carefree hobo; I am experiencing a great deal of stress and fear at present. This situation is frightening, especially because the money I’ve lost is not mine. I’m having trouble sleeping and concentrating on things other than the losses I’ve incurred. It’s borrowed, and there is no easy way for me to pay it back. I’ve resolved to rework my plan and then to work that plan until the market capitulates to my will and does whatever the hell I wish. To do this I unfortunately need to fight my way out of this hole or go deeper into debt. I need more capital and quick if I’m not only going to take advantage of these prices, but if I have any real hope of digging myself out of debt and maybe making some profit to boot. There’s no room for pride in this game. The second you start to think you know something, the whole financial system collapses and, defying all reason, your diamond in the rough is dragged straight down to hell. But alas I am humble, and I have no problem asking for and with any luck borrowing more green to speculate with.

I crapped my pants today. I’ve always known coffee is a diuretic, but what I seem to need a constant reminder of is the rare ability of coffee futures to elicit the same internal response. The market not only fell through long term support around 135, it dropped 6 cents on the day and closed at the low. One has to wonder why. One has to wonder why they were so stupid as to borrow 60 K and go all in when the entire commodities complex is going to shit, neigh, the entire financial institution is going to shit. As of today I’m down 50 %, quite a swing. After two weeks I was up 20K and now currently down 30K. So I’m left with the same two options I had before I lost 30 grand; do I stay in or get out?

Problem 1: Strong buy signals were given from both the MACD Histogram and the Relative Strength index on September 19th, marking the base for a nice little rally. These two indicators have been on the ball at the beginning of every major trend change in coffee for the last four years. Today however prices fell through previous lows and proved both of those buy signals incorrect. When such an event happens one needs to throw out all indicators because, well, they’re not working. This leaves a trader a tad naked, with only his discretion to guide him. This is basically the same as being naked because a trader’s discretion is as whimsical as a child’s love of a new toy.

Problem 2: There is no support for this market for a ways down, leaving me with the very real risk of watching this 50% loss becoming a 90% loss very quickly (which may only be another 5 to 10 cent decline if I had to estimate). This is when the vice of options trading, no liquidity, really hurts. If I wanted an out today in order to let this market get flushed out with all the rest, I’d have to give my options away for someone to be willing to take them off my hands.

Problem 3: Gold, Silver, and Crude have also given failed signals, and the markets spiraled further south.

Problem 4: I feel sick to my stomach and the panic that comes with riding a loss. And I crapped my pants.

Possible Explanations for today’s price move:

1. This plummet today is an example of throwing the baby out with the bath water. Coffee still has strong fundamentals, and even though damage can be done to prices temporarily people need caffeine and aren’t going to stop drinking just because a few assholes on Wall Street were successful at robbing millions of assholes on main street. This is the washout coffee needs to dump the last of the overleveraged hedge funds and welcome the last bit of commercial hedging before this market bottoms long term.
2. The rapid strengthening of the dollar has thrown off valuations of commodities to where comparing these prices with those 5 months ago are meaningless. The dollar has strengthened against the Brazilian Real, making current prices much less appealing to farmers, somewhere to the tune of 8 to 15% less appealing in real terms. Producers are capitalizing on higher exchange rates and selling this bottom regardless of what appears to be relatively cheap prices on the daily charts.
3. Manipulators are having a ball and taking out stops below the 135 level in order to make a quick buck. (Could be the case, but when prices close at the bottom of this 6 cent range I have to wonder where the buyers are. Not to mention days like this tend to precede larger declines. Coffee eats like a bird and shits like an elephant they say.)

Questions:
1. Why is coffee falling out of bed in late September when it refused to break support throughout the Brazilian harvest in May through August? I don’t believe that the harvest is flooding the market, even if exports from Brazil picked up pace. This is actually a normal seasonal pullback before prices commit to an uptrend, but it is rare for the September pullback to break support set in August or July.
2. Why have commercials not gone heavily long as of yet (as of today they may have, we won’t know until open interest and the Commitments of Traders report are released Friday). Commercial traders have been net long at the bottom of every seasonal change in trend for the last 5 years.
3. How do I protect myself at this point?

I still believe this market has reason to rise (I knew I was early to enter the market when I did). Therefore a fire sale won’t do here, not to mention no one is going to take my call options off my hands if the market continues to tank. So at the very least I’ll wait for a rally, large or small to liquidate my December contracts. Even if this market falls ten cents tomorrow, and it could, wiping out the rest of my equity in the process, I refuse to sell cheap and buy dear. It takes a lot of discipline not to be overrun with panic and sell sell sell, and that is indeed all I want to do at present. But so does everyone else, which is why odds are I’m better off being a buyer or waiting.

I have two months left on my December contracts, and those are the options which pose the largest threat. This little breakdown could weaken the market to where two months may not be enough time for buyers to regain their courage and pull prices back up to par. I need to be out at least another three to six months out at this point and will look to roll those Decembers further forward as soon as possible. Despite this stressful situation, I still have faith in power of market fundamentals to win out in the end, regardless of short term erratic behavior. And as we all know, low prices stimulate demand. Bring in the buyers!!!

As I mentioned previously Coffee futures showed this same strength during the large declines in most commodities over the last few months.  Again, something seems to be holding this market up.  News friday said that the Brazilian coffee harvest is about 20 percent behind last years, calling in to question quality of the current crop and also increasing the risk of next years crop having quality issues, should rains fall before the current crop is picked in full.  Despite the potential risk to next years crop, the supply and demand situation is still very bullish, even if all is well.

The final indicator I was looking for flashed BUY this weekend, which was a sharp contraction of open interest, signifying the commercial traders un-hedging and in some cases going long the market.  Commercial traders aren’t  speculators by nature, they are producers and users, and a net long position is indicative of long term value in prices.  As such I increased my position today, adding 6 call options at a strike price of $1.70 (20 cents out of the money) for May of next year.  This leaves me with a total position of 8 contracts for december and 6 for May.  This accounts for about 58K of the 60K I borrowed.  On a bounce in December futures to $1.60 or so I intend to liquidate December calls and roll them into May.  Time to hang on for the ride.

As of now I have 4 December 130 calls and 4 December 135 calls, each costing somewhere in the ballpark of 5 grand a piece, and each showing a loss of about a grand.  (Yes, for those math wizards this means I am down 8 thousand dollars on borrowed money within the first weak of putting the money to work…ouch.  That’s why I’m trading options, these declines are inevitable, and I’m still in the game.)  These contracts were not ideal, but I was having trouble getting into March and May and wanted to get my foot in the door.  I would have liked more time, but given a bounce I’ll look to sell the 135 calls at the very least and roll them into May contracts, in order to ride this market out.  I have 6 unfilled orders for May 170 calls costing around 2,500 a piece, assuming I can grab them at that price.

I’ll give a final update for this position when all is set or when changes are made.  Something I haven’t talked about yet with you all is that long dated options have a major downfall, namely that they are terribly illiquid.  It is very hard to get a quick fill like you might with a future.  It is difficult to get out of a failing position and difficult to get into what appears to be a winning one.  The best philosophy I can put forth is if it is difficult to buy, don’t, and if it is difficult to sell, don’t.  You don’t want to compete for a contract, it show’s you’re not buying weakness and selling strength.  The Tao of options trading in a sense.  Don’t struggle, be patient, and go with the flow.  See you soon, and hopefully out of the red.

Plan your trade and trade your plan they always say. And that’s what I’m doing here for all to see. It’s not that I want to expose my personal finances but I have a problem with the pool of experts and trading websites out there that only recommend trades. Now some of these experts may be very experienced and educated, but I don’t believe you can trust someone that makes their money giving advice, and is not also putting their own money at risk at the same time. And if you read the small print at the bottom of the page you’ll usually find something like, ‘trade at your own risk’ and ‘past performance is not indicative of future success’.

I have the greatest respect for people who disclose their positions, and as such, I ought to follow suit if I don’t want to be grouped with the rest. And it doesn’t hurt that hoboes have a proclivity for exposing themselves, usually on trains to stowaways for petty cash. So here we begin a 6 to 8 month case study on wealth creation via the principles of Hobofinance and putting my own credit and livelihood at risk. With any luck this case study will serve as a model for penniless hoboes everywhere.

The Plan:
1. Research a Market

Summarized in Superstition and the Coffee Baptism.

2. Secure Finances

In keeping with the theme of this site, I’ll trade as a hobo should, with money that isn’t mine and highly leveraged. The content of this site is geared toward those hungry for freedom, financial and otherwise, and who are unwilling to sacrifice the present for freedom in the distant future. Most of us don’t have a million dollars in the bank and we certainly don’t want to spend our time working for it. So, in accordance with our Hobofinance philosophy we’ll procure the funds we need by using OPM, other people’s money. Most hoboes don’t cavort with the wealthy however, so I’m going to plan this trade with money accessible to all; namely credit card loans via balance transfer checks. I’m using the methods described in Using Credit Card Debt to Make Money to secure $60,000 dollars. This is near the upper limit of my accumulated credit dispersed over 4 credit cards. We hoboes play for glory or for prison, and nothing in between.

3. Trading Strategy

A. Position and Money Management: I’m going to establish my position in two tiers of call options, with the intention of liquidating most of the first tier once I’ve doubled my money. (This happens quickly in commodities trading if you’re playing the right side of the market due to extremely high leverage). The first tier will be 5 to 15 cents in the money and priced around $6,000 each. The second tier will be out of the money 20 to 40 cents and cost around $1,000 to $3,000. The reason for trading this way is that if, on the rare chance coffee doesn’t move in 6 months, the ‘in the money’ call options will retain most of their value because a good portion of the premium is equity, providing a margin of safety for the account as a whole. The reason for the out of the money calls is simply that they’re cheaper, and I can hold a larger position than if I’d stuck only with the deep in the money calls.

Every ten cent rise or fall in coffee means a $3,750.00 profit or loss, so a twenty five to 35 cent rise in price at these options prices would mean 100 percent profit. A twenty cent rise would not even bring prices to their February highs, a price that seems to me easily surpassable given current fundamentals. Once my positions double I will liquidate the first round, which means I will have $60,000 in cash which I can use to pay off my loan or reinvest on a correction or both, and another $60,000 in call options, which are now all ‘at the money’ after the 20 cent price rise. These I will ride out through at least March of next year and possibly into May as the market factors in next year’s deficit crop.

B. Time Horizon: Futures, as the name suggests, are commodities contracts that have a specified time for delivery at some point in the future. Options, because they are based on the underlying futures contracts, also have a limited life, and expire just before the futures contracts come due. So an important element of options trading is identifying your time horizon. I’m basing things particular trade on the 2004-2005 coffee season, where market fundamentals were very similar to the current ones (though not as bullish), and where prices ran up over 70 cents from Sept. 04 to March 05. The strongest seasonal in coffee occurs in June at the onset of the Brazilian harvest and drags prices down sharply. So I am anticipating the coming supply deficit to be factored into prices by May of 09. Therefore I’ll be looking to purchase March, May and perhaps July 09 call options.

Why I’ve borrowed so much:
With this trading strategy, an account with less than $15,000 dollars would be too risky to trade. Trading with a larger sum using this two tier strategy will both give me more staying power over the long run, and allow me to pay off my debt without quitting the trade. I’m trading options here rather than futures because options require a lot less savvy, timing, and capital. One can trade a much larger position than would be prudent with futures, and one can wait until the market proves them right without having to meet a margin call. All that, and I’d like to retire by my 30th birthday.

A note to those with a broker or a futures account:
This trade is sound until prices have risen heavily, at which time one can’t take a profit without diminishing the position. The way to work around this, and the strategy I’ll be using with the other accounts I manage are as follows:

If the ‘out of the money’ calls wind up being 40 to 50 cents in the money (approximately $20,000 of equity per contract), they can be converted to the underlying futures contracts. I’ll do this because it will allow me to place a stop loss under certain floors in the market. If the market runs out of gas it will stop me out at a profit. If the market still has legs I can continue to raise the stop loss following the market higher securing more and more profit per contract.

The other benefit to converting options to futures is that the equity is no longer trapped in a single options contract but can actually be reinvested. This technique is called pyramiding, and although it is dangerous, it is how a great many fortunes have been made. The key is to make sure your reinvestment does look like a pyramid, with a narrow top supported by a larger base. So if you’ve got 10 contracts to start, you may want to increase your position by only 3 to 5, and again later by only 1 if the market is still on fire. At this stage stop losses are vital. If/when the market declines you’ll be loosing money on many more contracts than you had making money for you on the way up. Profits can disappear quickly.

When buying for the long haul there’s an overwhelming temptation to try to pick the bottom. As stupid as that is, I also have that urge to maximize gains by timing the market. But what timing indicator do we have that will tell us conclusively the bottom of a market year on year? None that I know of. There are some that come close: the MACD histogram, the Relative Strength index, and Williams% R which, in conjunction, all give a pretty good indication of major market shifts. My personal favorite is to follow the position of commercial traders as an indication of what buyers and sellers who intend to sell or take possession of the physical commodity feel is a relative level of value.

What makes me nervous this August is that, although the coffee seasonality is turning positive, commercial traders are not yet net long the market. Commercial traders have been net long coffee at least one time each year for the past 4 years between May and August. This year that pattern has not surfaced and is room for short term concern, as they may not yet feel prices have fallen low enough to start accumulating inventory for the coming season. And if users don’t need to buy, why should we?

Well, I don’t know. But what I do know is that coffee has been establishing a base for the last 4 months and that the Brazilian harvest is nearing its end, which is cause enough for a seasonal low. And despite the fact that commercial traders are not yet net long, their net short position has contracted by about 50 percent along with open interest since March. Coffee prices have also been much higher at some point between December and March of the last 4 years than they were in the preceding August. So those factors provide me with fundamental justification to enter a long term position, regardless of whether or not a definitive bottom is in. I’m buying what I consider to be relative weakness in price. I’ll be buying call options in order to ride this market for the long haul without fear of temporary and potentially sharp corrections downward. My orders are currently in and unfilled, focusing on March and July call options. I’ll disclose both my position and management strategy in the next entry after my position is set.

The worst thing a trader can do is ignore the rules he made with a calm and clear mind before his money was at risk and rely on his own discretion when the market doesn’t act accordingly. The market is impersonal, and accepting a loss as a personal affront is both irrational and common. At this point it is imperative that one takes a step back, breathes, analyses one’s mistake if there was one, and not, I repeat not to rely on outside mystical forces swirling around this benevolent universe just looking for the chance to manifest as your good luck.

That being said, the stars have aligned in a fortuitous coincidence. Yesterday my girlfriend and I went to the Ri Yue Gu Hot Springs in Xiamen China. These hot springs have tens of small springs, some with minerals, grains, or alcohol. I could hardly contain myself when I saw the sign ‘coffee pot’, a hot spring steeped with coffee grounds. Coffee, my favorite commodity and the one that’s about to take a severe beating from me over the next eight months.

‘This is a sign’ I shouted. This was no ordinary day. It was my birthday, and soon to be my rebirth day. I’ve been preparing recently for another round of balls out investing, ‘going all in’ as they say. I am about to buy a bunch of coffee, highly leveraged, and I just happened to find a pool of coffee to immerse myself in on my birthday of all days, in the middle of china. No! This was no coincidence. Stars are aligned and fixing to pay me out.

“I need you to baptize me. It’s my birthday. It’s important.”

As odd as she thought that was, it was after all my day and acquiesce she did. I asked her to say a few words, deep meaningful words about coffee and baptism and how albeit through osmosis I’d be absorbing the inveterate powers of the coffee bean, heightened senses and augmented concentration and what have you. I’d be bonded from this day forward with the holy spirit of coffee bean futures, through rallies and dips, oscillations and breakouts.

“No” she said, “it feels weird.”
“It’s my birthday and it’s fate. We’ll proceed.”

So I said all those inspirational words and explained to her the logistics of baptism; how to keep my head from crashing against the stone steps and that baptism is really more like dunking a donut than drowning an adversary, and we ought to keep it that way because the water is hot and I didn’t want coffee acid to corrode my eardrums.

I reemerged a new slightly older man.

And so, with said piety my fate was sealed. Coffee, baptisms aside, has a plethora of persuasive reasons to rapidly appreciate from these price levels:

1. Skyrocketing fertilizer costs should result in declining care of coffee trees for the coming season.
2. The Dollar continues to decline against the Brazilian Real making current values much less appealing for Brazilian farmers then they would have been 10 years ago. Prices are not yet high enough to stimulate new investment and crop expansion.
3. Producer stocks are at all time lows!
4. World consumption should outpace production in the 2009-2010 season. Supply will be somewhere in the ballpark of 10 million bags shy of demand, assuming good conditions.
5. We’re approaching the off year (2009) of the on-off production cycle for both Brazil and Vietnam which should stress world reserves to dangerously low levels.
6. Not only are global stocks low, but relative to usage they are at levels insufficient to ensure smooth movement through the pipeline without producers carefully rationing exports.
7. Coffee is in a long term bull trend since the lows of 2003, and the highs coffee futures made in February 08 broke through significant long term technical resistance, suggesting much higher prices to come.
8. Coffee is inexpensive relative to nearly all other agricultural commodities.
9. Coffee hasn’t yet shared in the pervasive commodities bull market and it’s simply a matter of time before hedge and mutual fund money flows into it with the force we’ve seen in crude oil, wheat, soybeans, and corn.
10. China and India, nations with a long history of tea drinking, are embracing western culture. Coffee is increasingly popular both in the soluble market which has really made a name for itself in Nescafe and in the rapidly growing coffee shop culture you can find in all first (largest, 10 million people plus), second, and now even third tier Chinese cities.

But if I were to insist that these wildly bullish factors are to result in much higher prices I’d still be like every other schizophrenic trader out there when the volatility sets in. I’d feel hope when prices rise and fear when they fall, the untrained impulses of baby traders. But these hobo hands are steady and this confidence is steadfast for another reason. I can say with relative certainty that I’m the only coffee trader this year to be baptized in a pool of coffee. And if that wasn’t enough I consummated my baptism by pulling the coffee bag out of the steaming natural spring and squeezed its yellow juices all over my head. Coffee will run, Amen!

I also happen to be very bullish on hogs, so if anybody finds a pool of lean hogs…