Seasonality in my opinion is one of the most overlooked and important factors in commodity trading in general, and coffee futures trading in particular. Seasonality is the tendency for a commodity to rise or fall at a certain time of year, every year. In many commodities like cotton, wheat, cocoa, and cattle, this manifests in rising prices after the peak in harvest, and falling prices in anticipation of harvest. In other words, seasonality in most agricultural commodities is supply driven.

In other commodities like crude oil and gold, where supply tends to be relatively steady, barring any natural disasters, seasonality is demand driven. Crude oil futures rise from March through May in anticipation of the summer driving season, and again from July through September in anticipation of the winter heating season. If a trader is familiar with these seasonal tendencies alone, and has an intelligent money management system for reducing risk and maximizing gains, I believe trading on seasonality alone is enough make a fortune in commodity trading.

How does this apply to our best investment pick for 2009; coffee futures? Coffee futures prices are heavily influenced by seasonality. There are a few major coffee producers and those few make up the great majority of coffee supply. Naturally, coffee futures prices are very sensitive to the production cycles of these producing nations. Brazil, the largest producer, harvests coffee in the summer months, starting in May or June and lasting through August. In anticipation of the massive contribution to the supply chain, prices drop sharply nearly every June. This is one of the strongest seasonal tendencies in all commodity trading.

There have been only a few exceptions in the last thirty years. So if you’re long coffee futures in May tighten your stops and reduce your position. Coffee prices may also experience declines in September or October before the Vietnamese harvest begins. A great many of my losses could have been avoided if I had taken heed of seasonality, rather than focusing on the fundamentals and technicals of a market alone. So if coffee prices tend to fall under the burden of heavy supply two times a year, when do they tend to rise?

If you’re planning to go long coffee futures and want the support of seasonality, you’ll want to enter in October and look to tighten stop losses in December, and again enter in February looking to tighten stops sometime between March and the end of May. To add weight to seasonality, every major Bull Run in coffee futures prices in the last 30 years occurred between October and May of the following year. Every major Bull Run! During years of large crop production which transitioned to years of much smaller supply, like the year we are currently in, prices had a hard time breaking north before February due to the weight of copious supply from the previous on-year harvest.

When the brunt of this supply began to thin, as it already has already this year, and there is no fresh supply until June, then coffee futures prices can respond with unfathomable strength. In sum, seasonality in conjunction with extremely tight fundamentals and dirt cheap prices is suggesting that coffee futures prices are due to pop. It is mid February, supplies are tight, prices are cheap, and no more coffee is coming online prior to June, when an inadequate and cyclically smaller crop will be harvested in Brazil. Seasonality is one of the many factors supporting my view that coffee futures are the ‘best investment in commodity trading for 2009′.

Coffee futures trading can be very intimidating at first.  Coffee futures have a reputation for being extremely volatile, and its one of those commodities that has no daily limit for price movement.  Meaning there’s no limit to how much you could make or loose in a single day.  But for those beginners out there, lets break down this daunting world of coffee futures trading.

Coffee is now electronically traded on ICE.  One coffee contract accounts for 37,500 pounds of coffee.  So whenever coffee moves a cent, you arrive at the profit and loss figure by multiplying that cent by 37,500, realizing a profit or loss of $375.  If you are long coffee futures and prices rise 10 cents, you make $3,750.  Not too complicated. 

Where coffee futures trading gets exciting is the tremendous amount of leverage a futures contract has.  Most of us could not afford to buy a coffee contract outright.  At today’s futures prices ($1.20 per pound) an entire contract is worth $45,000.  Too rich for my blood.  Fortunately for those of us who want to join in the game, we can buy this contract on margin for a fraction of the value of the entire contract.  At current prices and volatility levels, you can control a coffee futures contract, accounting for 37,500 pounds of coffee, for about $3,000 on margin.  What does this mean?

If you own a single coffee futures contract, and the price of coffee rises only 10 cents, you have more than doubled your initial investment.  If on the other hand coffee prices fall 10 cents, you have lost more than 100 percent of your initial investment, unless you’ve placed a tight stop loss or hedged your position with a put option.  10 cents is a hiccup for coffee.  Coffee futures prices can move faster and farther than imaginable should the right news pop up, or should a series of stop losses get triggered.  This makes for a very risky and potentially very lucrative trading experience. 

At current coffee futures prices, and at current margin requirements, it would be unwise to trade a single futures contract in this market with less than $20,000 starting capital, or a good deal of experience with technical analysis and stop losses.  Coffee is a very difficult market to step into for the long haul without allowing for a good deal of price fluxuation.  Having a stop loss less than 10 cents below your entry point will create a high probability of getting stopped out on a small decline, which will shake you out of your position, and having a stop loss of greater than 10 cents gives a pretty poor risk to reward ratio.  So if you want to attempt coffee futures trading start by paper trading or taking small positions with strict adherence to your trading system.