30 Dec 2020 · 3 min read
A Guide to How Coffee is Traded
By Keiran Jones
Anyone who drinks coffee knows its price fluctuates over time. Investors and traders can profit from these price movements by knowing how this agricultural commodity is traded.
Coffee trading isn't just done by savvy investors buying and selling thousands of pounds on large futures exchanges. Consumers can learn to trade coffee by using popular financial instruments and easy-to-use mobile apps.
Coffee Facts
Coffee is considered a “soft” commodity. Soft commodities are resources that are grown, such as sugar, wheat, and livestock. In contrast, “hard” commodities are raw materials that are extracted and mined, such as crude oil and nickel.
● Coffee is the third most popular drink behind water and tea.
● There are two main types of coffee: Arabica and Robusta.
● Brazil grows about 40% of the world’s coffee.
● Robusta is mainly grown in East Asia with Indonesia and Vietnam growing the most.
● In the U.S., the coffee industry employs over 1.7 million people
How Coffee Is Traded
People trade coffee to profit from its price movement or to hedge current positions they hold. The various ways to trade coffee include:
● Coffee futures
● Coffee CFDs (contracts-for-difference)
● Coffee options
● Coffee ETFs and ETNs (exchange-traded funds and notes)
● Shares of coffee companies.
Futures
A common way that coffee is traded is via futures. For example, a company that uses coffee can buy it on the futures market. This is done to lock-in the price for delivery at a future date. The price they pay at the time of delivery will probably be different than it is bought that day, but it allows the company to plan their costs.
Coffee futures are also speculated on. These contracts can be highly leveraged — allowing you to control a large amount of coffee with a small amount of money. This is one reason that futures are usually only used by highly experienced traders.
CFDs
CFDs (contracts-for-difference) allow traders to profit from the difference in price from the time they buy the contract to the time they sell it. These contracts can also be highly leveraged.
CFDs, which were developed in London, are not legal in the US, but they are widely used elsewhere in the world.
Options
Closely related to futures are options. A trader can buy calls if they believe the price of the underlying asset will rise before the expiration date.
They can buy puts if they think the price will fall before the expiration date. If the price has not moved enough by the expiration date, the option will expire worthless. When buying options, the loss is limited to the cost of the option.
ETFs and ETNs
ETFs and ETNs are like bonds issued by an institution. Here are two well-known funds that track the price of coffee:
● iPath Pure Beta Coffee ETN (CAFE)
● iPath Series B Bloomberg Coffee Subindex Total Return ETN (JO)
Shares
Most coffee bean producers are privately-owned. Investors can buy shares of India’s largest coffee producer, Tata Coffee Ltd, or they can buy shares of Green Mountain Roasters, Starbucks, and similar companies.
What Affects Coffee Prices?
Traders don’t just guess at the price direction of coffee. They have to pay attention to all of the factors that cause coffee prices to move.
The weather can cause coffee prices to be volatile. If there were a freeze in Brazil, much of that year's coffee crop could be destroyed, which would cause a price jump. While cold weather is the biggest threat, droughts or long rainy periods can also damage coffee trees.
As much as 65% of the coffee beans come from five countries, Brazil, Vietnam, Colombia, Indonesia, and Ethiopia. Any political instability in any of these countries can cause coffee prices to increase.
Economic changes can affect coffee prices. If the economy is in recession, people won't have as much money to spend, which can cause prices to fall.
Longer-term conditions that affect coffee prices include:
● Global climate change can affect weather conditions in coffee-growing regions.
● Health news about coffee can affect current demand. Articles that might come out that coffee is healthy will increase demand.
● Wage increases in emerging markets can increase demand for coffee in these countries.
Summary
Traders can profit in the price movement of coffee by trading in futures, CFDs, options, ETNs, and shares of coffee companies.
The price of coffee is affected by geopolitical and weather conditions where coffee is grown. It is this volatility that helps traders profit by trading on the price movement of coffee.
This article was written by Commodity.com and published here on Coffee Rambler.
