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′.