“Price squeezing” (also known as inversion) is a phenomenon in the market where near-month futures prices are higher than far-month prices. Typically, the spot price (for example, for March) is lower than the far-month futures price. The price difference is usually explained by supply and demand for the respective delivery months, or the higher price of future months is to help cover costs such as storage, losses, etc., for inventory held over for those months.
However, recently the price trend has inverted. As the name suggests, the near-month price (for example, for March) is higher than the far-month price (for example, May). For instance, at the close of trading, the March 2012 contract was priced at $1,950 per ton, which was higher than the May contract’s closing price of $1,930 per ton.
This inversion, or “squeezing,” is attributed to a shortage of available spot contracts, which causes the spot price to rise sharply.
Why does price squeezing happen?
When this phenomenon occurs, traders take advantage of available stock in their possession (such as in bonded warehouses) by moving it to European warehouses for sale in the near-month Robusta coffee futures market, at a price higher than the later months.
Unless long-term commitments to customers for future months are already in place (where there’s no storage cost and prices are lower), traders are incentivized to ship as much as possible from stockpiles in producing countries to ready the goods at ports, prepared for sale at favorable prices.
For example, during the period between Q1 and Q2 of the previous year, the price squeeze reached over $100, and Vietnamese Robusta coffee stocks kept flowing into Liffe warehouses, resulting in a record high of nearly 420,000 tons in certified Liffe NYSE stocks — the highest ever in history.
In conclusion, price squeezing happens when the near-month contract price exceeds the far-month, typically driven by market shortages and strategic trading practices to capitalize on available inventory.