@sdelsad/commodity-desk-daily 1.0.39 → 1.0.41

package/ep13.md

@@ -1,229 +0,0 @@
-# Market pulse
-
-**Coffee's visible inventory fell to a twenty-seven-year low on Thursday, and the price fell four percent on the same tape.**
-
-| Market | Contract | Price | Change |
-|---|---|---|---|
-| Arabica (ICE) | Dec 26 | 309.65 c/lb | −12.50c / −3.88% |
-| Robusta (ICE) | Nov 26 | $3,555/t | −$59 / −1.63% |
-| Chicago wheat | Sep 26 | 742.75 c/bu | +12¼c |
-| KC wheat | Sep 26 | 803.50 c/bu | +11½c |
-| Corn (CBOT) | Sep 26 | 510.25 c/bu | −3¾c |
-| Soybeans (CBOT) | Sep 26 | 1256.50 c/bu | +2¼c |
-
-Certified arabica stocks at the exchange fell again, to **224,011 bags** — the lowest in twenty-seven years. On Monday that same story was worth five percent to the upside. By Thursday it was worth nothing, and December arabica has given back thirty-two cents in three sessions.
-
-What changed is not the warehouse. It is the crop. Brazil is finishing late but finishing large, and the forecasts now say record. Cooxupé, the country's largest cooperative, had members 87.5% harvested at 21 August against 91.3% a year earlier — late, but no longer alarming. Safras & Mercado put the whole 2026/27 harvest at 90% done on 12 August against 97% last year. Vietnam supplies the other half of the divergence: January-to-July robusta exports ran 21.1% above last year, and certified robusta stocks are at a nine-month high while arabica's are at a generational low. Same drink, opposite warehouses.
-
-```chart
-{"type":"line","mode":"index","unit":"rebased to 100 at 24 August","title":"The warehouse stopped mattering","caption":"Certified stock barely moved while the price fell nine percent. When an inventory story stops moving the tape, the market has started pricing something else — here, the crop.","source":"ICE arabica December settlements and ICE certified arabica stocks, 24 and 27 August 2026","x":["24 Aug","27 Aug"],"series":[{"name":"Dec arabica","values":[341.65,309.65]},{"name":"Certified stock","values":[226242,224011]}]}
-```
-
-In the grains, wheat took the lead again, with Chicago and Kansas City both up more than eleven cents and corn slipping.
-
-**The policy read: a tariff line that never touches the board.** The United States imposed a 25% Section 301 tariff on Brazilian goods on 22 July, and coffee sits among more than 1,600 exempt lines. The mechanism matters more than the headline. A tariff is levied on delivered value, so it can never appear in a New York settlement — it appears in the differential a US buyer will pay for a Brazilian bag. With the exemption, that bag costs a New York roaster what it costs a Hamburg roaster, and American buyers stop bidding Colombian and Central American coffee away from Europe. Watch the same channel in December, when the EU deforestation rules finally apply and split every origin differential into compliant and non-compliant.
-
-# Key takeaways
-
-- A coffee contract does not name a price. It names a differential against a futures month, and that differential is the only number the two parties actually negotiated.
-- The board prices arabica in general. The differential prices *this* coffee — this crop, this screen, this shipment month, these roads.
-- An exporter's whole business fits inside eleven cents a pound. After milling, freight and finance he keeps about three. The flat price never enters the calculation.
-- Price-to-be-fixed splits one trade into two decisions: the differential now, the futures price later. A desk that believes it is hedged is frequently hedged on only one of them.
-- A properly hedged exporter is flat on price whenever the buyer fixes. What he is not flat on is cash, the roll and credit.
-- The right to fix is an option, and it is granted for free. Its value is the whole distance the market travels before fixation.
-- Fixing risk is sold as market risk and settled as credit risk. The exposure grows every cent the market moves against the unfixed party, and that party has posted nothing.
-- Rolling a short hedge into a cheaper month costs money cent for cent. In an inverse, waiting for a buyer to fix has a price tag.
-- A frost rally prices the worst plausible case immediately and gives it back slowly. That asymmetry is why the rally is vertical and the retracement is a slope.
-- The fund loses on the way down; the physical desk loses on the way up. Direction is the fund's risk. Margin, differentials and timing are the desk's.
-
-# Vocabulary
-
-| Term | What it means |
-|---|---|
-| **price-to-be-fixed (PTBF)** | A physical contract where quantity, quality, shipment and differential are agreed now and the futures price is set later |
-| **fixation** | The act of setting the futures leg of a PTBF contract, which converts the differential into a flat price |
-| **buyer's call** | A PTBF contract in which the buyer holds the right to choose the moment of fixation |
-| **seller's call** | A PTBF contract in which the seller holds that right |
-| **fixation window** | The period inside which the fixing party must declare, normally ending before the referenced contract's notice period |
-| **outright** | A contract agreed at a flat price rather than as a differential, with no fixation to come |
-| **fixing risk** | The exposure created by the gap between agreeing a differential and setting the price, carried as market risk by the fixing party and as credit risk by the other |
-| **first notice day** | The first day on which the holder of a short futures position may tender delivery, and the practical deadline for rolling a hedge |
-| **roll cost** | The gain or loss from moving a hedge to a later month, equal to the spread between them and negative for a short hedge in an inverted market |
-| **green coffee** | Unroasted milled coffee beans, the form in which all internationally traded coffee moves |
-| **farmgate price** | What the grower is actually paid at the farm, after the intermediary's margin and inland costs are taken out of the export value |
-| **cooperative (co-op)** | A grower-owned body that pools, mills and markets members' coffee, and often the counterparty an exporter actually buys from |
-| **managed money** | Speculative funds reported as non-commercial in the exchange's positioning data, which trade direction rather than physical |
-| **net length** | A fund category's long positions less its short positions, the number that says how much of a rally is positioning |
-| **retracement** | The partial give-back of a price move once the fear that produced it fails to be confirmed |
-| **Section 301** | The US statute under which country-specific tariffs are imposed after a trade-practice investigation, applied to Brazilian goods from 22 July 2026 with coffee exempt |
-| **EUDR** | The EU deforestation regulation, which from December 2026 requires proof that a shipment's land was not deforested, and which will split origin differentials into compliant and non-compliant |
-
-# Quiz
-
-**Q1.** On Monday 24 August a Rotterdam roaster buys 25 lots of Brazilian natural — 937,500 lb — from an exporter at **December plus 22.00**, buyer's call, fixation any time up to 15 November. December arabica settled 341.65 that day. The exporter hedges the same afternoon by selling 25 December futures at 341.65. On Thursday 27 August December settles 309.65 and the roaster fixes there.
-
-(a) What does the roaster pay, in cents per pound and in dollars, and what would he have paid had he fixed on Monday?
-
-(b) Set out the exporter's flat-price profit and loss across both legs and show what it comes to.
-
-(c) The roaster's risk system has shown "25 lots of coffee bought" since Monday. State the position he was actually carrying between Monday and Thursday, and how it should have appeared on the sheet.
-
-(d) Now run the same structure backwards. Suppose the contract had instead been signed in late June, when December was 255.25, and was still unfixed on Monday at 341.65. Compute the exporter's mark-to-market credit exposure to that unfixed buyer, and say why it is not a market risk.
-
-**Q2.** An exporter has sold 10 lots price-to-be-fixed against December and hedged by selling 10 December futures. In mid-November the buyer still has not fixed, so the hedge must be rolled into March. March is trading 12.00 cents under December. What does that roll do to the exporter's hedge, in cents per pound and in dollars?
-
-**Q3.** *(Ep 12)* Certified arabica stocks fell to a twenty-seven-year low of 224,011 bags on Thursday. Using the valve from episode 12, say what that number tells you about the physical differentials for the deliverable origins.
-
-**Q4.** *(Ep 10)* Episode 10 established that a Baltic index is a broker panel's route assessments converted into a time charter equivalent, and that an FFA hedges that basket rather than your voyage. A coffee exporter moves his crop in 20-foot containers on liner services out of Santos. Say whether a Panamax FFA would hedge his freight cost, and why.
-
-**Conversion drill.** A container is loaded with 320 bags of green coffee at 60 kg each. Convert the load to pounds using the mental method.
-
-# SOLUTIONS (spoilers)
-
-**A1.** The whole question is built on one idea: in a PTBF contract the differential and the price are two separate decisions, taken on two different days, by two different parties.
-
-*(a) What the roaster pays.*
-
-| Fixing date | December | Differential | Flat price | On 937,500 lb |
-|---|---|---|---|---|
-| Monday 24 Aug | 341.65 | +22.00 | 363.65 c/lb | $3,409,218.75 |
-| Thursday 27 Aug | 309.65 | +22.00 | 331.65 c/lb | $3,109,218.75 |
-
-Waiting three days saved **32.00 c/lb, or $300,000**. The differential did not move. Only the leg he had not yet fixed moved.
-
-*(b) The exporter's flat-price P&L.*
-
-| Leg | Movement | Result |
-|---|---|---|
-| Short 25 Dec futures at 341.65, bought back at 309.65 | +32.00 c/lb | +$300,000 |
-| Physical sale fixed 32.00 lower than Monday's level | −32.00 c/lb | −$300,000 |
-| **Net** | | **$0** |
-
-That is not luck, it is the design. The hedge is unwound at the same price that sets the physical, so the two legs cancel whenever the buyer chooses to fix. The exporter never had a view and never needed one.
-
-*(c) What the roaster was actually carrying.*
-
-He was **long 25 lots of December futures** — 937,500 lb of unhedged flat-price exposure — plus a fixed differential and a delivery obligation. Buying coffee PTBF and not fixing is economically identical to buying the futures, because the flat price he will eventually pay moves cent for cent with December until he declares.
-
-On the sheet it should appear as two lines, not one: a **differential position** of +22.00 on 25 lots, which is closed, and an **unfixed futures exposure** of 25 lots long December, which is open and should sit in the same book as any other outright. A risk system that shows "coffee bought" and stops there is hiding the only position in the trade that can still move.
-
-*(d) The credit exposure.*
-
-December ran from 255.25 to 341.65, so **86.40 c/lb**. On 937,500 lb that is **$810,000**.
-
-That is what the unfixed buyer is under water by, and it is why the exposure is not market risk to the exporter. The exporter is hedged: whenever the buyer fixes, his own two legs cancel as in (b). The $810,000 is the amount the buyer must swallow when he declares — and therefore the amount he has an incentive to walk away from. He has posted no margin, because a physical contract has no clearing house behind it.
-
-So the exporter's real question is not where coffee is going. It is whether a counterparty who is $810,000 offside is good for it. This is the trap in the whole structure: a desk grants the fixing option for free, prices nothing for it, and then discovers it was writing unsecured credit all along. Desks that have been through it cap unfixed tonnage per counterparty and call for margin once the mark passes a threshold, exactly as a clearing house would.
-
-**A2.** The roll costs **12.00 c/lb, or $45,000** on 375,000 lb.
-
-Rolling a short means buying back the near month and selling the deferred. Buy December, sell March at 12.00 under, and the short has been re-established twelve cents lower — every cent of which is a loss when it is eventually covered. In a carry market the same mechanic pays a short hedger; in an inverse it charges him.
-
-The trap is that nothing recovers it. The differential was fixed in the contract at signature and cannot be reopened because the buyer was slow. The 12 cents comes straight out of a margin that, on the numbers in today's episode, was about 3 cents a pound gross of the roll. One deferred fixation can turn a profitable cargo into a loss without the price of coffee moving at all.
-
-The honest counter-argument: the exporter holds physical coffee, and in an inverted market physical prompt coffee is worth the spot premium. True — but only if he can sell it prompt. He cannot, because it is already committed to a November-shipment contract. The inverse pays whoever is free to deliver now, and a PTBF seller is not.
-
-**A3.** It tells you that physical differentials for the deliverable origins are **above** the exchange's fixed origin differentials — that roasters are outbidding the exchange for the same bags.
-
-Episode 12's valve runs in one direction at a time. Coffee walks into a licensed warehouse only when delivering it to the exchange is worth more than selling it to a roaster, which happens when the physical differential falls below the contract's fixed number for that origin. When roasters bid up, the coffee never reaches the warehouse; it goes to a plant. A twenty-seven-year low in certified stocks therefore says nothing about whether coffee exists. It says the deliverable float is being outbid, which is exactly what you expect with Brazil's arabica harvest running behind and buyers covering nearby needs.
-
-The corollary is the useful part, and it is today's lesson from the other end: certified stock is a *differential* statistic wearing the clothes of a supply statistic. That is why it can print a generational low on a day the flat price falls four percent. The two numbers are measuring different markets.
-
-**A4.** No, it would not hedge him, and the reason is worth being precise about.
-
-A Panamax FFA settles against a basket of named dry bulk routes assessed by a broker panel and expressed as a time charter equivalent. The exporter's cost is a container slot rate on a liner service, set by carrier tariffs, box availability and equipment repositioning. The two prices are not driven by the same thing: dry bulk rates move on tonne-mile demand for grain, coal and ore against fleet growth, while box rates move on manufactured-goods trade, blanked sailings and schedule reliability. There are stretches where they move together, and those stretches are coincidence, not structure.
-
-This is the cross-hedge test from episode 5 taken past its breaking point. Hedging Black Sea wheat with Matif at least works on quiet days, because both are wheat and the world price is a common driver. Here there is no common driver, so the "hedge" is simply a second, unrelated position — the classic way a desk turns one risk into two.
-
-What the exporter actually does is put the freight into the differential. Containerised coffee has no liquid freight hedge, so the cost is estimated, loaded into the number he quotes, and revisited when it moves. That is the general answer for any freight exposure without a paper market: if you cannot hedge it, you must price it, and you must reprice it more often than you would like.
-
-**Conversion drill.** **42,240 lb.**
-
-320 bags × 60 kg = 19,200 kg. Then the method: double it, 38,400; add ten percent, 3,840; total **42,240 lb**. The exact figure is 42,329 lb, so the mental version runs about 0.2% light — close enough to quote a number on the phone, never close enough to invoice on.
-
-Worth carrying: at Thursday's 309.65 plus a twenty-two-cent differential, that single container of coffee is worth roughly $140,000. A twenty-foot box holding a hundred and forty thousand dollars is one reason coffee logistics is guarded like it is.
-
-# The written edition
-
-## The number in the contract is not a price
-
-A coffee contract does not say what coffee costs. It says **December plus twenty-five**: twenty-five cents a pound over the December New York contract, for a named origin, a named screen size and a named shipment month.
-
-That plus twenty-five is the **differential**, and it is the only part of the deal the two people on the phone negotiated. Everything the exporter knows sits inside it — how the crop cupped this year, whether the roads out of the Cerrado are moving, what the co-op is paying its members, how many bags are already committed to somebody else. The New York board knows none of that. New York prices arabica in general. The differential prices this coffee.
-
-The clearest way to see how much of the business lives there is to build an exporter's margin and notice what is missing from it.
-
-| Line | c/lb |
-|---|---|
-| Sold to roaster, December plus 25 | +25.00 |
-| Bought from the co-op, December plus 14 | −14.00 |
-| Drying, milling, bagging, inland to Santos | −4.50 |
-| Ocean freight and insurance to a New York warehouse | −2.00 |
-| Finance until the roaster pays | −1.20 |
-| **Net margin** | **3.30** |
-
-Ten lots is 375,000 lb, so 3.30 c/lb is **$12,375** on the cargo.
-
-```chart
-{"type":"waterfall","unit":"c/lb","title":"Where an exporter's money actually is","caption":"The whole business fits inside an eleven-cent differential and keeps about three. Thursday's 309.65 appears nowhere in it.","source":"Worked example, episode 13","steps":[{"label":"Sold, Dec +25","value":25.0,"kind":"base"},{"label":"Bought, Dec +14","value":-14.0},{"label":"Milling and inland","value":-4.5},{"label":"Freight and insurance","value":-2.0},{"label":"Finance","value":-1.2},{"label":"Net margin","kind":"total"}]}
-```
-
-Thursday's 309.65 appears nowhere in that table. The exporter is not in the coffee price business. He is in the eleven-cent business.
-
-## How it is quoted
-
-> **BUYER:** Brazil naturals, seventeen-eighteen screen, November shipment. Where are you?
-> **SELLER:** Plus twenty-eight against December.
-> **BUYER:** I did plus twenty-two last week.
-> **SELLER:** Last week you were buying September shipment. Boats are full in November.
-> **BUYER:** Plus twenty-five, price to be fixed, my call.
-> **SELLER:** Done.
-
-Neither of them said what coffee costs. They negotiated a differential, defended it with a shipment month rather than a market view, and then the buyer asked for one more thing: *my call*.
-
-## Price to be fixed
-
-**Price-to-be-fixed** means the physical is agreed now and the flat price is set later. The contract names a futures month and a window, and one side holds the right to declare the price by buying or selling that month. **Buyer's call** means the roaster fixes; **seller's call** means the exporter does.
-
-Run this week through it. The contract is signed on Monday 24 August at December plus twenty-five, buyer's call, fixation to 15 November.
-
-| | December | Flat price | On 10 lots (375,000 lb) |
-|---|---|---|---|
-| Fix Monday 24 Aug | 341.65 | 366.65 | $1,374,937.50 |
-| Fix Thursday 27 Aug | 309.65 | 334.65 | $1,254,937.50 |
-
-The roaster waited three days and paid **$120,000 less** for the same coffee. He did not trade. He declined to.
-
-```chart
-{"type":"bar","unit":"c/lb paid by the buyer","title":"Same coffee, three fixing dates","caption":"The differential was agreed once and never moved. Everything in this chart is the leg the buyer had not fixed yet.","source":"ICE arabica December settlements 23 June, 24 and 27 August 2026, plus a 25-cent differential","x":["Fixed 23 Jun","Fixed 24 Aug","Fixed 27 Aug"],"series":[{"name":"Flat price paid","values":[280.25,366.65,334.65]}]}
-```
-
-So who paid for the roaster's $120,000? Not the exporter, and this is the part people get wrong.
-
-The exporter sold 10 December futures on Monday at 341.65 to hedge himself. When the roaster fixes on Thursday, those futures are bought back at 309.65. The hedge makes 32 cents; the physical sale is 32 cents lower. Net, zero. He is flat on price whenever the buyer chooses to declare — exactly as designed.
-
-## Three things he is not flat on
-
-**Cash.** He is short futures. Had the market rallied 32 cents rather than fallen, he would have wired variation margin against a physical gain that does not become cash until the coffee ships and the documents are paid. Episode 3 called that liquidity risk. It is the same animal in a different market.
-
-**The roll.** If the buyer has not fixed by the time December approaches first notice day, the short hedge has to move to March. Moving a short into a cheaper month costs the spread, cent for cent, and in an inverted market that spread can be a multiple of the whole margin. Nothing recovers it, because the differential was fixed at signature.
-
-**Credit.** This is the one that bites. The buyer's right to fix is an option, and the exporter granted it for nothing. Every cent the market moves against an unfixed buyer is a cent that buyer would rather not pay. When December ran from 255.25 in late June to 341.65 on Monday, a buyer who signed at the bottom and never fixed was 86.40 c/lb offside — $810,000 on twenty-five lots, owed by a counterparty who has posted no margin because a physical contract has no clearing house behind it.
-
-Fixing risk is sold as market risk and settled as credit risk. That sentence is the whole reason serious desks cap unfixed tonnage per counterparty and call for margin once the mark passes a threshold.
-
-## The anatomy of a rally, and two ways to lose on it
-
-In late June, December arabica was 255.25 and the funds had flipped from net long to net short — 3,557 lots of net selling in the week to 9 June alone. Then the harvest ran late, the frost watch came on in southern Minas, the Cerrado and São Paulo, and the certified warehouse kept draining. By Monday the contract was 341.65, up a third.
-
-A frost rally is not a supply number. It is the price of a distribution, and the distribution is drawn by a handful of weather models. Nobody can know what was damaged for two or three weeks, because frost damage shows up as leaf loss and then as next year's flowering. So the market prices the worst plausible case immediately and gives it back slowly, as each week fails to confirm the fear. That asymmetry is the shape: the rally is vertical, the retracement is a slope. This week's three sessions — 341.65 down to 309.65 against record Brazilian forecasts — are the slope.
-
-The fund loses on the way down. That much is obvious: it was long, and long is wrong when the crop turns out fine.
-
-The physical desk loses on the way **up**, which is not obvious at all. Three things happen to it at once during a rally:
-
-- It is short futures against coffee it already owns, so it funds daily margin calls out of working capital while the offsetting gain sits in unsold inventory.
-- Its unfixed customers all fix near the top, which is their right and costs the desk its cheapest fixations.
-- Farmers stop selling. The differential the exporter must pay to replace his coffee climbs, while the differential he already sold is written into a contract at last month's number.
-
-The fund's risk is direction. The desk's risk is margin, differentials and timing. Neither of them is really trading the price of coffee — which is why, on a day when certified stocks hit a twenty-seven-year low and the board fell four percent, the two of them were looking at completely different screens.

package/ep13.script.txt

@@ -1,130 +0,0 @@
-Three days ago, coffee's visible inventory fell to its lowest level in twenty seven years. ||| 0.4
-On the same tape, the price fell four percent. ||| 0.6
-If you are watching the flat price to understand this market, you are watching the wrong number. ||| 0.7
-This is Soft Commodity Trading, episode 13. ||| 0.5
-Today: differentials, price to be fixed contracts, and what a rally actually costs the people who own the coffee. ||| 0.8
-Thursday's tape first. ||| 0.4
-December arabica settled at three hundred nine point six five cents a pound, down twelve and a half cents, near four percent. ||| 0.4
-November robusta settled at three thousand five hundred and fifty five dollars a tonne, down fifty nine. ||| 0.5
-And exchange certified arabica stocks fell again, to two hundred twenty four thousand and eleven bags. ||| 0.35
-That is the lowest in twenty seven years. ||| 0.6
-Read those two facts together. ||| 0.35
-The warehouse emptied, and the market sold off. ||| 0.5
-On Monday the same inventory story was worth five percent to the upside. ||| 0.4
-By Thursday it was worth nothing. ||| 0.6
-What changed is not the warehouse. It is the crop. ||| 0.4
-Brazil is finishing late, but finishing big, and the forecasts now say record. ||| 0.4
-Cooxupé, the largest cooperative, had members eighty seven and a half percent harvested on the twenty first of August, against ninety one point three a year ago. ||| 0.4
-Late, but no longer alarming. ||| 0.5
-Vietnam is the other half of the story. Robusta exports in the first seven months ran twenty one percent above last year. ||| 0.4
-Robusta certified stocks are at a nine month high while arabica's are at a twenty seven year low. ||| 0.5
-Same drink. Opposite warehouses. ||| 0.6
-In the grains, wheat took the lead again. ||| 0.35
-Chicago September closed seven forty two and three quarters, up twelve and a quarter. Kansas City up eleven and a half. ||| 0.35
-September corn slipped three and three quarters, to five ten and a quarter. September beans finished near unchanged. ||| 0.6
-The policy read today is a tariff line, and it belongs to the subject. ||| 0.4
-The United States put a twenty five percent tariff on Brazilian goods on the twenty second of July. ||| 0.35
-Coffee is one of more than sixteen hundred exempt lines. ||| 0.5
-Here is the mechanism. A tariff is paid on delivered value, so it never lands on the New York board. ||| 0.4
-It lands on the differential. ||| 0.5
-With the exemption, a Brazilian bag costs a New York roaster what it costs a Hamburg roaster, and American buyers stop bidding Colombian and Central American coffee away from Europe. ||| 0.5
-That is a differential event, not a price event. ||| 0.4
-And a differential is what we are going to spend the next eight minutes on. ||| 0.8
-Start with what a coffee contract actually says. ||| 0.4
-It does not say a price. ||| 0.35
-It says December plus twenty five. ||| 0.5
-Twenty five cents a pound over the December New York contract, for a named origin, a named screen size, a named shipment month. ||| 0.5
-That number, the plus twenty five, is the differential. ||| 0.35
-It is the only part of the deal the two people on the phone actually negotiated. ||| 0.6
-Everything the exporter knows is inside it. ||| 0.35
-How the crop cupped this year. Whether the roads out of the Cerrado are moving. What the cooperative is paying farmers. How many bags are already committed. ||| 0.5
-The New York price knows none of that. ||| 0.5
-New York prices arabica in general. The differential prices this coffee. ||| 0.7
-Put a real margin around it. ||| 0.35
-An exporter sells ten lots of Brazilian natural to a roaster at December plus twenty five. ||| 0.35
-Ten lots is three hundred seventy five thousand pounds, about a hundred and seventy tonnes. ||| 0.5
-He buys the coffee from the cooperative at December plus fourteen. ||| 0.4
-So he starts with eleven cents. ||| 0.5
-Now spend it. ||| 0.35
-Drying, milling, bagging and the truck down to Santos, four and a half cents. ||| 0.35
-Ocean freight and insurance to a New York warehouse, two cents. ||| 0.35
-Financing the position until the roaster pays, one point two cents. ||| 0.5
-He is left with three point three cents a pound. ||| 0.4
-On the ten lots, twelve thousand three hundred and seventy five dollars. ||| 0.6
-Notice what never appeared in that arithmetic. ||| 0.4
-Three hundred and nine cents. ||| 0.35
-The flat price of coffee is not in the exporter's profit and loss at all. ||| 0.5
-He is not in the coffee price business. He is in the eleven cent business. ||| 0.8
-Here is how that gets quoted. ||| 0.5
-BUYER: Brazil naturals, seventeen eighteen screen, November shipment. Where are you? ||| 0.25
-SELLER: Plus twenty eight against December. ||| 0.25
-BUYER: I did plus twenty two last week. ||| 0.25
-SELLER: Last week you were buying September shipment. Boats are full in November. ||| 0.25
-BUYER: Plus twenty five, price to be fixed, my call. ||| 0.3
-SELLER: Done. ||| 0.7
-Neither of them said what coffee costs. ||| 0.4
-They agreed a differential, and then the buyer asked for something extra. ||| 0.5
-My call. ||| 0.4
-That is the second half of today. ||| 0.8
-Price to be fixed. ||| 0.4
-The physical is agreed now. The flat price is set later. ||| 0.5
-The contract names a futures month and a window, and one side gets the right to declare the price by buying or selling that month. ||| 0.5
-Buyer's call means the roaster fixes. Seller's call means the exporter fixes. ||| 0.6
-Take this week's numbers. ||| 0.35
-The contract is signed on Monday the twenty fourth. December plus twenty five, buyer's call, fixation any time up to the middle of November. ||| 0.5
-December on Monday was three forty one sixty five. ||| 0.35
-Fix on the spot and the roaster pays three sixty six sixty five. ||| 0.5
-He does not fix. He waits. ||| 0.4
-On Thursday December is three oh nine sixty five, and he fixes there. ||| 0.4
-He pays three thirty four sixty five. ||| 0.5
-Thirty two cents a pound cheaper. ||| 0.35
-On ten lots, a hundred and twenty thousand dollars. ||| 0.6
-For three days of doing nothing. ||| 0.7
-So who paid for that? ||| 0.5
-Not the exporter, and this is the part people get wrong. ||| 0.4
-The exporter sold ten December futures on Monday at three forty one sixty five to hedge himself. ||| 0.4
-When the roaster fixes on Thursday, those futures come back at three oh nine sixty five. ||| 0.4
-The hedge makes thirty two cents. The physical sale is thirty two cents lower. ||| 0.4
-Net, zero. ||| 0.5
-The exporter is flat on price, exactly as designed. ||| 0.7
-But he is not flat on everything. Three things sit on his book while he waits. ||| 0.5
-First, cash. ||| 0.35
-He is short futures. Had the market rallied thirty two cents instead of falling, he would have wired variation margin against a physical gain that is not cash until the coffee ships. ||| 0.5
-Episode three called that liquidity risk, and it is the same animal. ||| 0.6
-Second, the roll. ||| 0.35
-If the roaster has not fixed by the time December goes off the board, that short hedge has to move to March. ||| 0.4
-In an inverted market, moving a short into a cheaper month costs money, cent for cent. ||| 0.5
-Third, and this is the one that actually bites. ||| 0.4
-Credit. ||| 0.5
-The buyer's right to fix is an option, and the exporter granted it for nothing. ||| 0.4
-Every cent the market moves against an unfixed buyer is a cent that buyer would rather not pay. ||| 0.5
-When arabica fell from three forty two to three ten, unfixed buyers got a gift. ||| 0.4
-When it ran from two fifty five in June up to three forty two in August, unfixed buyers were eighty seven cents under water. ||| 0.5
-On a hundred lots that is over three million dollars, sitting with a counterparty who has posted nothing. ||| 0.6
-Fixing risk is sold as market risk and settled as credit risk. ||| 0.8
-Which brings us to the rally itself, and why two people lose money on the same move in opposite directions. ||| 0.6
-Look at this year. ||| 0.35
-In late June, December arabica was two fifty five and the funds had flipped from net long to net short. ||| 0.4
-Then the harvest ran late, the frost watch came on in southern Minas and the Cerrado, and the certified warehouse kept draining. ||| 0.5
-By Monday, three forty one sixty five. ||| 0.35
-Up a third. ||| 0.5
-Now the anatomy. ||| 0.35
-A frost rally is not a supply number. It is the price of a distribution, and the distribution is drawn by a handful of weather models. ||| 0.5
-The market cannot know what was damaged for weeks, so it prices the worst plausible case immediately, then gives it back slowly. ||| 0.5
-That is why the rally is vertical and the retracement is a slope. ||| 0.6
-The fund loses on the way down. That much is obvious. It was long, and long is wrong when the crop turns out fine. ||| 0.5
-The physical desk loses on the way up, which is not obvious at all. ||| 0.6
-On the way up it is short futures against coffee it already owns, so it funds margin calls daily. ||| 0.4
-Its unfixed customers all fix at the top, which is their right. ||| 0.4
-And farmers stop selling, so the differential the exporter must pay to replace his coffee climbs while the differential he sold is written into a contract. ||| 0.6
-The fund's risk is direction. ||| 0.35
-The desk's risk is margin, differentials and timing. ||| 0.4
-Neither of them is really trading the price of coffee. ||| 0.8
-Three things to keep. ||| 0.5
-One. The differential is the negotiated price and the board is only the reference. An exporter's whole business lived inside eleven cents this morning, and the flat price never entered the calculation. ||| 0.6
-Two. Price to be fixed splits one trade into two decisions. The differential now, the futures price later. A desk that believes it is hedged is often hedged on one of the two. ||| 0.6
-Three. An unfixed contract is an option you granted for free, and a credit exposure that grows with every cent the market travels. ||| 0.5
-Watch the size of it, not the direction. ||| 0.7
-Next time: sugar. Raws and whites, and the ethanol switch that lets a Brazilian mill decide every morning whether it is in the food business or the fuel business. ||| 0.6
-The notes carry four questions, full worked answers and today's conversion drill. ||| 0.4
-The first one is worth twenty minutes. ||| 0.5