Coffee Commodity Trading Basics

Coffee is an important commodity and a popular beverage. Over 2.25 billion cups of coffee are consumed in the world every day. Over 90% of coffee production takes place in developing countries, while consumption happens mainly in the industrialized economies. Worldwide, 25 million small producers rely on coffee for a living. For instance, in Brazil alone, where almost a third of all the world's coffee is produced, over 5 million people are employed in the cultivation and harvesting of over 3 billion coffee plants; it is a much more labor-intensive culture than alternative cultures of the same regions as sugar cane or cattle, as it is not subject to automation and requires constant attention.

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Climate is crucial for success in achieving good yields as well as having an optimum temperature range of between 17 and 23 centigrade and favorable soil conditions. While there are about 60 different varieties of coffee, the main two which are of any real economic significance are Arabica and Robusta. These are the two varieties which are actively traded as futures on the major commodity exchanges.

Coffee is the second most commonly traded commodity in the world (measured by monetary volume), trailing only crude oil as a source of foreign exchange to developing countries, according to the International Coffee Organization. While production and consumption of many commodities tend to rise and fall based on price, shifts in coffee supply and demand are not so prone to price changes as people continue to look for their morning cup of coffee at whatever the price is. An important distinction for coffee futures traders is that two different types of coffee are traded on the world's exchanges.

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Coffee Prices & Rates

Arabica coffee futures and options are traded in New York on the Intercontinental Exchange (ICE, formerly the New York Board of Trade).
  • The size of the Coffee "C" futures contract is 37,500 pounds.
  • Coffee commodity trading is now done electronically.
  • Coffee futures prices are quoted in cents per pound, and the minimum price fluctuation is 5/100 cent/pound, equivalent to $18.75 per contract.
  • A 1-cent change in price equals $375.
  • The coffee futures contract months are March, May, July, September and December.
  •  The contract prices physical delivery of exchange-grade green beans from one of 19 countries of origin in a licensed warehouse to one of several ports in the United States and Europe.
Coffee Trading Fundamentals

Robusta coffee futures are traded in London on Euronext.liffe.
  • The size of this coffee futures contract is 10 metric tons.
  • Coffee futures prices are quoted in U.S. dollars per metric ton with the minimum price movement $1 per ton or $10 for the contract.
  • Contract delivery months are January, March, May, July, September and November with 10 delivery months available for trading.
Other international exchanges that trade coffee futures include the Singapore Commodity Exchange (Robusta), the Commodities & Futures Exchange (BM&F) in Brazil (Arabica) and the Tokyo Grain Exchange (Arabica and Robusta).

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Coffee Trading Tips

Veteran traders will give you a couple of tips about trading related to weather:
  • Never be short orange juice going into January.
  • Never be short coffee going into July.
The reasoning is the same: the threat of winter freezes. In the case of coffee futures, a freeze or threat of a freeze in Brazil that could be severe enough to damage coffee trees and reduce coffee production, perhaps for several years, can have a substantial impact on prices because of the dominant role Brazil has in the world coffee market. Depending on the world coffee supply situation, some traders are reluctant to be short coffee after May, looking ahead to the Southern Hemisphere s winter season. However, this seasonal tendency is not real strong because other countries such as Mexico can fill in with coffee supplies.

Coffee Trading Information

Coffee futures traders should be aware that because coffee production occurs in relatively few countries, it is possible that coffee shipments might be controlled in an effort to boost coffee prices, such as has occurred in the past and similar to what has happened in crude oil and some other markets. Coffee futures prices have been relatively quiet for a number of years but are not immune to blow off price explosions, as older price charts will reveal.

Coffee Trading Supply

A coffee tree can provide enough coffee beans to fill a one-pound can of ground coffee during each growing season. Coffee beans are the seeds of cherry-sized berries, the fruit of the coffee tree. It takes 3 to 5 years after planting a coffee tree before it can produce marketable coffee beans.

The bulk of world coffee production comes from the tropical highlands of the Western Hemisphere and in the low, hot areas of Africa and Asia. South and Central America produce the majority of coffee traded in world commerce. The world's major coffee producers are Brazil, Vietnam, Colombia and Indonesia. Brazil and Colombia produce mostly Arabica coffee and together account for more than 40 percent of world coffee production. Vietnam produces Robusta coffee, generally considered to be a lower quality type of coffee than Arabica.

The world produces about 120 to 140 million 60-kilogram bags of coffee per year (one 60-kilo bag equals 132.276 pounds). Coffee production can vary significantly from year to year, depending whether Arabica coffee trees are in the on-year or the off-year of their biennial production cycle. Simply comparing this year s output to last year s may be misleading for the U.S. coffee futures trader.

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From plantation to market

Arabica, which represents about 70% green coffee bean production, is grown in warm, humid climates at altitudes above 4,000 ft, and this combined with the soil conditions helps it achieve its characteristic aromatic flavor. Arabica is mainly grown in the high altitudes of Latin America, such as Brazil, Peru, Venezuela, Ecuador and Columbia. One of the best grades of Arabica coffee in Brazil is Santos, where the beans are picked within the first 4 years of the coffee tree’s life. Normally with Arabica there is a long lead time of 4-5 years, while with the lower quality Robusta, grown in South East Asia, the beans are picked after 2-3 years.

Robusta is normally grown on land between sea level and 2,000 feet, and can cope with more volatile changes in climate, hence its name. Drought can cause crop yields to collapse, and so lead to coffee futures prices rising. If rainfall is too high this can also lead to lower crop yields, with similar impact on prices. Freezing can impact a crop for the current year and the following year. This is usually a problem for Arabica varieties in the higher altitudes in Latin America. Statistics show that in recent years serious freezing has happened in one in every six years in winter (June to August) months in the southern hemisphere.

The coffee tree first produces white blossom and then over a period of two weeks to 6-9 months green cherries begin to grow and these fill out into reddish and then black cherries. Each cherry contains 2 coffee beans. Most coffee is processed using the “dry” method where the cherries are stripped off the tree and the green beans are dried and graded, ready to be shipped for roasting. A rough calculation is that about 2,000 cherries (4,000 beans) produce one pound of coffee. The characteristic flavors and aroma of coffee are developed during the roasting process, when these diverse flavors, up to now trapped in the green coffee bean, are released.

Coffee Trading Demand

The United States is the world s largest importer of coffee. Kraft, Nestle, Procter & Gamble and Sara Lee are the major roaster companies and account for purchases of about 50 percent of all the annual production of coffee. Demand for coffee is price inelastic: When coffee prices rise, people do not reduce their coffee consumption proportionally; when coffee prices fall, consumer demand for coffee does not proportionally increase to any great extent. Seasonally, U.S. coffee consumption tends to rise in the winter, which may lend support to coffee futures prices.

Coffee Trading History

The International Coffee Organization produces statistics on international coffee production and shipments and promotes coffee trading among nations. Based in London, the ICO consists of 55 coffee producing and consuming member countries and makes available a great deal of data and other information to coffee futures traders.

The Foreign Agricultural Service of the U.S. Department of Agriculture also offers a wealth of coffee information and statistics, including production data by country and for the world, import and export data, etc. The various exchanges that trade coffee futures also have lots of information.

Sources and Additional Information:

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