Learn How to Trade Coffee: The Largest Soft Commodity in the World

Trading coffee can be lucrative and beneficial for investors and traders. While some use Cofee futures and options to hedge their commodity and assets, others speculate coffee prices. In this article, you will learn all you need to know about Coffee trading.
Learn How to Trade Coffee: The Largest Soft Commodity in the World

Coffee is a soft commodity and is the second largest commodity product behind oil traded around the globe. It’s the most popular worldwide drink other than water and tea. Most of the coffee produced around the globe comes from Brazil which provides approximately 40% of the global coffee grown. The most popular coffee consumed is Arabica coffee which was originated in the Arab world. Another very popular style of coffee is Robusta. Robusta is generally more bitter than Arabica and is growing throughout east Asia. Many coffee brewers combine Arabic and Robusta to generate a smooth yet robust flavor.

Who Trades Coffee?

There are several industry groups that trade coffee. Some trade coffee to hedge their physical exposure while others speculate on the future direction of prices.  Coffee hedgers include producers and consumers. A producer of coffee is a grower. A grower will plant coffee trees that generally produce fruit within 7-years. For Arabica coffee trees, it takes approximately 1-tree to pick enough fruit to produce 1-pound of coffee. A coffee tree produces coffee beans which are picked and dried and then roasted. The darker the coffee the more robust the flavor. Darker coffee has a lower caffeine content relative to lighter coffees.

A coffee grower might consider locking in coffee prices as they reach levels that provide them profits. A coffee producer can use coffee futures and options as well as coffee CFD’s to hedge their coffee exposure. They can do this by selling coffee for a date in the future and fixing the price where they can sell their coffee production, protecting against declining coffee prices. A company that purchases and resells coffee might consider purchasing coffee futures to hedge against rising coffee prices. Coffee speculators can speculate on the direction of coffee prices by buying and selling coffee futures and options as well as speculating using CFDs but please be aware that your capital is at risk.

Coffee Futures and Options

The most active coffee futures and options contracts are those cleared through the Intercontinental Exchange (ICE). The Coffee contract is traded on the ICE and is considered the global benchmark for Arabica coffee. The contract is quoted in dollars and reflects the prices of physical delivered exchange-grade green beans, that can be delivered from one of 20 countries to a licensed warehouse to one of several ports in the U. S. and Europe.

The physical contract size of the Coffee C futures contract traded on the ICE is 37,500 pounds. This means for each future contract you hold through the settlement period you are responsible for taking physical delivery of 37,500 pounds of coffee at a regulated warehouse.

Coffee futures on the ICE are quoted in cents and hundredths of cents per pound up to 2-decimal places. The contract series are for delivery in March, May, July, September, and December. They represent the dates during the calendar that physically deliver through ICE futures contracts can take place. The minimum price fluctuation is 5 1/100ths of a cent per pound which equals $18.75 per contract.

As for grades and standards, the regulated warehouses create a benchmark and the coffee that is delivered is priced at par with the benchmark. Coffee that is considered better trades at a premium and coffee that is subpar trades at a discount.

Delivery Points and Growth Locations

According to the Intercontinental exchange, there are approximately 20-growth locations that can be delivered to a regulated warehouse. These include Mexico, Salvador, Guatemala, Costa Rica, Nicaragua, Kenya, Papua New Guinea, Panama, Tanzania, Uganda, Honduras, and Peru all at par, Colombia at 400-point premium, Burundi, Rwanda, Venezuela and India at 100 point discount, Dominican Republic and Ecuador at 400 point discount, and Brazil at 600 point discount. These growths can be delivered to regulated exchange warehouses that are licensed in the ports of New York District, Virginia, New Orleans, Houston, Miami, Bremen/Hamburg, Antwerp, and Barcelona.

How Does a Commercial Lock in Prices?

For a coffee farmer who is growing trees harvests every year, if the price of coffee increase to a level that will allow he/her to lock in a price that is a profit, they might consider a forward sale. In many of the coffee growing regions, coffee is harvested through the winter. A producer might be ready to sell the coffee in the spring. If they have 150,000 trees they plan to harvest, they will produce 150,000 pounds of coffee. One way to lock-in current future prices is to sell a futures contract. In this situation, they could sell 4-futures May contracts which is equivalent to 150,000 pounds of coffee (37,500 * 4). During the May delivery period, they could then deliver their coffee and receive the price they sold their futures contracts for.

Speculating on Coffee Prices

If you want to speculate on the price of coffee, you could consider buying or selling a futures contract but will need to open up an account with a futures broker. An alternative is to trade a coffee contract for differences (CFD). A coffee CFD is a security that allows you to speculate on the direction of coffee prices, but you do not have to take physical delivery of the coffee at settlement. Instead, a coffee CFD allows you to be responsible for the difference in the price of coffee from when you purchase the CFD to the point where you sell your CFD. Reputable CFD brokers like Markets.com allow you to trade coffee CFDs in dollar per pounds. The leverage on CFDs can reach 300-1 which allows you to significantly increase the gains or losses you experience when trading coffee prices. Please be aware that trading CFDs carries a considerable risk of capital loss.

Summary

Coffee is a liquid soft commodity product, that allows growers and consumers the opportunity to hedge their coffee exposure. In addition, traders can speculate on the future direction of coffee prices using coffee futures and options as well as coffee CFDs through Markets.com (your capital is at risk). The most liquid coffee futures are traded on the Intercontinental Exchange. The benchmark for global Arabica coffee trading is the ICE C Coffee Futures Contract. This contract can be delivered to the several U.S. and European deliver warehouses from 20-different growth countries around the globe.

HIGH-RISK INVESTMENT WARNING: Trading Foreign Exchange (Forex) and Contracts for Differences (CFDs) is highly speculative, carries a high level of risk and is not appropriate for every investor. You may sustain a loss of some or all your invested capital, therefore, you should not speculate with capital that you cannot afford to lose. You should be aware of all the risks associated with trading on margin. 

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