By Max Nicholas-Fulmer
The last time the New York “C” contract reached the levels we’ve witnessed over the last few months was 1997, when futures hit $3.20/pound. The impetus for that move was neither frost nor drought, but the simple fact that in February of that year the “Certified Stocks” of green coffee in bonded U.S warehouses shrank to an anemic 321 bags.
If you don’t know what the Certified Stocks are, it is useful to think of them as the gold in Fort Knox. This is the actual physical coffee that underlies the “C” contract. If you buy a contract and hold it until expiration, you will receive a delivery notice from the exchange that you are now the proud owner of 37,500 pounds of unroasted washed arabica coffee in a warehouse in New York, or New Orleans, or Hamburg (or a number of other specific port cities). Likewise, were you to “short” the market and stay short through expiration, you would owe the exchange the same amount of coffee. So it follows that if there is no coffee in the various exchange warehouses, prices have to rise until someone is willing to deliver it.