What trader doesn’t start his day with a nice cup of coffee before heading to his trading station to kick off a new day? While coffee is an essential item for many people around the globe (with around two billion cups drunk every day), it is also a commodity you can trade. Less popular than oil, gold, or natural gas, coffee can provide great trading opportunities if you understand this market and how you can take advantage of it.
Learn more about coffee trading in this article, from what coffee trading is and what impacts the prices of this commodity to the advantages and risks of trading coffee, to decide whether or not you should add this financial asset to your portfolio.
What is Coffee trading?
Derived from a plant, coffee belongs to the “soft” commodity category, as it is grown and not mined or extracted. While there are different types of coffee beans you can trade on specialty markets, Arabica and Robusta are the most traded ones. Arabica beans are usually considered premium, high-quality beans and account for around 70% of all coffee production, while Robusta are smaller beans with higher caffeine and account for 30% of the total production of coffee.
So, what does coffee trading mean? You’ve probably guessed - it means you can buy and sell, or short-sell, financial contracts on coffee to take advantage of the underlying commodity’s price fluctuation and make a profit.
Market specifications
Both types of coffee beans are traded on the Intercontinental Exchange (ICE), under the ticker Coffee C or KC for Arabica coffee and RC for Robusta coffee, in the form of future and option contracts. It is also possible to trade Arabica coffee futures on the New York Mercantile Exchange (NYMEX) under the ticker KT.
According to data from the ICE, trading hours for coffee are from 4:15 AM to 1:30 PM in New-York, from 9:15 AM to 6:30 PM in London, and from 4:15 AM to 1:30 in Singapore. On the NYMEX, coffee can be traded from Sunday to Friday from 6:00 PM to 5:00 PM.
The size of the Coffee C and KT contracts is 37,500 pounds with a price quotation in U.S. dollars and cents per pound, and a minimum price fluctuation equivalent to $18.75 per contract.
The most important coffee producers and importers
According to the U.S. Department of Agriculture, the two biggest arabica producers are Brazil and Colombia, followed by Ethiopia, Honduras, Peru, Guatemala, Mexico, and Nicaragua, while the three largest Robusta producers are Vietnam, Brazil, and Indonesia, followed by Uganda, India, Malaysia, Cote d’Ivoire, and Thailand. Taking into account the total production of coffee, Brazil, Vietnam, Colombia, Indonesia, and Ethiopia are the five largest coffee producers. The European Union, the United States, Japan, the Philippines, and Canada are the world's largest total importers of coffee.
What makes the price of coffee go up or down?
The following factors have the biggest impact on the price of coffee:
- Supply and demand.
- US Dollar.
- Climate.
- Consumption habits.
- Geopolitical tensions.
- Trade agreements.
- Tariffs and import/export restrictions.
- Coffee diseases.
- Production and transportation costs.
- Decisions from the biggest coffee buyers and roasters.
- Speculation, trading flexibility, and diversification
Coffee trading: what are the risks?
While trading coffee, you need to be aware of several risks that can lead to potential losses, either because of the financial products used to trade coffee or because these factors can weigh on coffee prices:
- High market volatility.
- Low market liquidity.
- Stronger dollar.
- Higher energy costs.
- Leverage effect when using margin trading to trade coffee.
- Climate change.
- Lower worldwide water quality.
- Seasonality.
- Lower purchasing power might force the population to reduce its consumption of coffee.
- Changes in health and nutrition trends.
Coffee trading: What are the growth opportunities?
There are different trends and growth opportunities that can support the coffee market, such as the following:
- Younger coffee customers (especially when it comes to coffee-derived drinks).
- New artisans craft signature specialty drinks based on coffee and other coffee-related products, allowing custom ordering, (ready-to-drink (RTD) coffees, cold or iced flavored coffees, unique coffee blends, RTD coffee mixed with non-dairy alternatives, textured and milky coffees, fermented coffee, nitro coffee, coffee treats, buttered coffee, etc.).
- Technological improvements in the coffee industry (smarter coffee machines, automation of processes, new brewing methods, improved traceability and transparency in the coffee supply chain, like through the blockchain, etc.).
- Trendy coffee shops with health-conscious and more sustainable coffee options.
- Coffee tourism.
- Coffee subscriptions.
How to trade coffee
There are different financial instruments you can use if you want to add coffee to your trading strategy. You can use futures contracts, options, or ETFs (Exchange-Traded Funds) for instance. It is also possible to invest in coffee stocks, as there are companies producing or selling coffee, brewing machines, or other related items, such as Starbucks, Keurig, Dr Pepper, Nestle, J. M. Smucker, Farmer Bros. Co, or Black Rifle Coffee Company.
If you’re an active trader using a scalping or day trading strategy, you can turn to Contracts for Difference, or CFDs, on coffee futures provided by ActivTrades to speculate on the direction of coffee prices (upwards or downwards). CFDs also enable you to take advantage of leveraged trading through margin trading, which is a great option to profit from all market conditions and start small.
Range-bound trading and trend trading are 2 of the more popular trading strategies used in coffee trading. Whatever strategy you use, always remember to follow your trading plan and your money management rules while trading coffee, as it will help you be more disciplined and better protect your capital.
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