Commodities & “Fundamentals” That Drive Them: It's Pure Poppycock!

Last year, all fundamental signs pointed DOWN for coffee futures. Find out where they went... and where they're headed now

by Nico Isaac
Updated: November 11, 2021

Once upon a time there lived a strapping Siamese cat named Poppycock. Like sands in the litterbox, these are the days of his nine lives. In one of these lives, Poppycock is a great leader among cats who sires dozens of kittens and builds a mighty feline dynasty.

In another life, Poppycock comes back as the first's Poppycock's long-lost,evil twin brother.

In a third, Poppycock returns as the second Poppycock's long-lost other brother of apparent triplets.

And on and so on, nine increasingly inconceivable lives in total.

This, dear readers, is an outlandish story inspired by the long-running soap opera, "Days of Our Lives" AND starring my own, real life cat Poppycock. I wrote it as an example of something so obviously made up that no one in their right mind would ever mistake for truth.

But what about the story told by mainstream finance since the time of the Buttonwood Agreement? The one spread every single day by respected sources from Wall Street to High Street which says external events called fundamentals drive price moves in financial markets. In this story, it's not so apparent what's truth, and what's fiction.

Take, for instance the coffee futures market. Back in May and June 2020, coffee was the worst-performing global commodity with several strikes against it, including:

• A massive supply glut
• A six-year high in production
• Global supply chain disruptions due to Covid, and
• A steep drop-off in consumption due to the shut-down of cafes and tightening of consumer wallets for "luxury" items like specialty beverages.

Here, a May 3, 2020 BBC News interviewed those struggling on the commodity's "ground" floor. Ground, as in the soil from which coffee farmers plant and harvest their beans. Their outlook for the future of their crop was as grim it gets:

"Coronavirus Coffee Farmer: 'We're definitely scared. We don't know how things will progress... We will keep producing coffee but where are we going to sell it? That's the difficult question."

From there, the consensus about coffee's future grew more bearish:

"The weakening demand and recession environment should put a lid on price upside." (June 29, 2020, Bloomberg)

So went the story: The star, coffee, was being threatened by a bevy of bearish, fundamental villains that ensured the commodity's trend would continue down. And yet, this chart of coffee futures shows the exact opposite scenario took place. Prices doubled from their mid-2020 low, soaring to the 7-year highs we see today.

It's not a talking, Siamese cat soap opera star! But the mainstream story about fundamental events driving price trends is just as fictional.

Which begs the question: What is the real story about what moves markets?

The answer by way of Elliott wave analysis is... Investor psychology, which unfolds as tracible patterns on price charts.

In the case of coffee, we turn to our June 2020 Monthly Commodity Junctures, where chief analyst Jeffrey Kennedy identified a bullish wave pattern on coffee's long-term price chart: an ending diagonal, pictured here as an idealized drawing and then in real-time on Jeffrey's price chart of coffee.

When you see an ending diagonal, it signals one thing and one thing only: exhaustion of the larger trend. This meant the days of coffee's multi-year decline were numbered. In Jeffrey's words:

"Big picture view works the idea that the selloff from the 2014 high is an ending diagonal. The selloff that began earlier this year within this formation is the final wave of this pattern.

"We are close to completion. If we were to see the bottom at or near current levels, I would want to see a five-wave move up and beyond the June high. That would be the first hurdle to overcome before we get excited about getting a tradable low in place."

From there, coffee embarked on a three-month long rally to 2-year highs before reversing sharply lower into October of 2020. Then, in the October Monthly Commodity Junctures, Jeffrey said the "wait" for the culmination of the ending diagonal and resulting advance was over.

And, once again, coffee's uptrend resumed, rocketing prices to the 7-year high reached this July and since, maintained.

In the end, investors have one objective: to distinguish between the popular fiction and the real facts about what drives prices in the markets they follow.

In his November 3 Daily Commodity Junctures, editor Jeffrey Kennedy shines the spotlight on coffee once again, showing this chart of the year-long rally. And once again, that unmistakable triangle pattern is underway.

Readers of this article already have a leg (or paw!) up about what that could mean for the commodity in the weeks and months ahead.

Find out the full story today with a risk-free subscription to our complete, Commodity Junctures Service.