Arabica Coffee/Robusta Coffee Spread Exit
The blog entered a hypothetical short position in the Arabica coffee/Robusta coffee spread at on October 14th. The current position consists of one short 37,500 lb. May Arabica coffee contract and three long 10-tonne May Robusta coffee contracts entered at the equivalent of +$13,872.50 (premium Arabica).
On March 3rd the ratio between the value of one 37,500 lb. Arabica coffee contract and one 10-tonne Robusta coffee contract touched a thirteen-month low of 2.55:1. Historically, the ratio starts to look cheap once it slips below 2.25:1. Therefore, the odds of a continued decline in the spread are starting to diminish greatly.
From the early March low, the May Arabica coffee/Robusta coffee (x3) spread rallied nearly $10k. This was the largest rally in the last several months, indicating a trend change. Furthermore, the May spread surpassed a prior month’s high for the first time since October and altered the bearish price structure. It also made a two-day close above the declining 50-day Moving Average for the first time in five and a half months. This confirmed the bullish trend change.
This coffee spread has ‘bean’ a great trade, but the recent reversal indicates that it may be time to get out. The May Arabica coffee/Robusta coffee (x3) spread pulled back slightly from the April 6th bounce high, so we recommend using this opportunity to book the profits and complete a successful trade. Once you have closed out the position, go to your favorite coffee house and have a large pour over to celebrate! Be sure to tip your barista.
For tracking purposes, the blog will liquidate the hypothetical short spread position at today’s close by buying back the short 37,500 lb. May Arabica coffee contract and selling the three 10-tonne May Robusta coffee contracts.