Coffee – Commodity

Instrument description

A hot cup of coffee is what millions of people reach for every morning to refresh themselves. According to statistics, a mind-boggling number of 2.25 billion cups of coffee is consumed by people all across the world. Coffee is considered to be not only a popular beverage but also an essential commodity. The coffee beans are mainly produced in many developing countries and account for 90% of the production. There are roughly 25 million small producers whose livelihood depends on producing coffee beans.

Today, coffee as a commodity is worth more than $100 Billion every year. The coffee demand is always increasing, which makes it quite a volatile yet lucrative tool for investment. The investors use coffee Futures Contracts and Options to hedge their portfolio while the short term traders rely on using Contract for Difference (CFD) for speculating to make a potential profit if the market goeas there way.

Coffee is a slowly brewed liquid that is made from roasted coffee beans. Coffee is derived from a green plant known as ‘coffee plant,’ which is commonly grown in areas having tropical and sub-tropical climates. Coffee is grown in over 70 countries of the world and dominant in South America. Brazil is the leading producer of coffee with nearly third (35%) of the world’s coffee, and an estimated 5 Million workers are involved in cultivating and harvesting the coffee beans. The top five coffee producers according to metric tons includes

1. Brazil (2,595,000)
2. Vietnam (1,650,000)
3. Columbia (810,000)
4. Indonesia (660,000)
5. Ethiopia (384,000)

According to consumption, the Nordic countries love hot, smooth coffee and lead the list based on consumption statistics. The top 5 coffee countries based on per person consumption are

1. Finland - 12 kg
2. Norway - 9.9 kg
3. Iceland - 9 kg
4. Denmark - 8.7 kg
5. Netherlands - 8.4 kg

History of Coffee

Coffee was first cultivated in the 1400s in Ethiopia, where the coffee beans were dried, roasted, and then turned into a liquid form that was served to the Kings. The coffee beans started to gain popularity and make their way into the Western world. Coffee today is a major export commodity of over 12 countries and ranked seventh as the world-leading agricultural export according to value. The coffee beans are one of the most traded commodities and exchange in all the global exchanges such as New York Mercantile Exchange (NYMEX), Intercontinental Exchange (ICE), Chicago Mercantile Exchange (CME), Brazilian Mercantile and Futures Exchange (BM&F), Singapore Commodity Exchange (SICOM), and Multi Commodity Exchange (MCX).

The largest importers and consumers of coffee include United States, Europe, Canada, Japan, and South Korea. The global consumption of coffee keeps on increasing with an estimated rate of 2%, and apart from home and office consumption, the business of retail coffee shops have also expanded in recent years. Coffee is considered a major agricultural commodity, and in the U.S alone, coffee contributes to 1.6% of the Gross Domestic Product (GDP) and has an economic impact of more than $225 Billion.

As coffee beans are grown in more than 50 countries of the world, there is a certain difference in characteristics of the coffee beans. The coffee beans are categorized according to taste, aroma, shape, texture, and acidity. The two main types of coffee beans are Arabica and Robusta

• Arabica

The Arabica beans are cultivated in South America, Eastern Africa, and Asia. The Arabica beans have a flat and oval shape with lighter and splendid taste. The Arabica beans are expensive and account for 70% of the total coffee offered in the market

• Robusta

The Robusta beans are mostly grown in central and western Africa and in the Southeast Asian countries. The Robusta beans are smaller in size and have a strong aroma and taste due to high caffeine content. The Robusta beans account for 30% of total coffee production.

The Arabica beans are consumed more due to its higher quality, but it’s the Robusta beans that are traded at higher prices and used by many multinational companies such as Nestle for its popular ‘Nescafe’ brand. Both the Arabica and Robusta beans are traded on the ICE under Future Contracts and Options.

Arabica has a ticker symbol of ‘K.C.’ while the Robusta has a ticker symbol of ‘R.C.’ The contract deliveries for Arabica occur every year in March, May, July, September, and December. The contract deliveries for Robusta occur every year in January, March, May, July, September, and November.

However, the Arabica is quoted in USD per pound while the Robusta is quoted in USD per metric ton. The Arabica coffee is also traded in NYMEX and CME with the ticker ‘K.T.’

Supply and demand of Coffee

Nearly all the commodities function according to supply and demand, but coffee is one of the few commodities where the prices are entirely dependent on the supply as the demand for coffee is considered inelastic and continues to increase. The U.S is considered to be the largest importer of coffee, but the European countries are in front when it comes to consumption of coffee per capita.

The new coffee producers also tend to affect the supply and demand dynamic. For instance, before 1990, Vietnam had no name in coffee production, but from mid-nineties till now, Vietnam is the second-biggest coffee producer after Brazil. The prices of coffee fell in the early 2000s due to Vietnam joining the trade of coffee beans. However, due to efficient quality, South America has again got a strong grip on the coffee market

The weather and climate of the region also play a crucial role in the growth of coffee. A particular land known for the cultivation of coffee can be lost due to a rise in temperature and irregular rainfall patterns. Due to rapid climate change, many of the African countries may not be able to produce coffee at all in the coming years.

How to read the price change of Coffee

Coffee is the main source of caffeine and one of the most commonly traded commodity. The coffee market is valued at more than $100 Billion. The U.S Coffee-C acts as a benchmark for the Arabica coffee contract. The U.S Coffee-C is used to fix a price for the physical transfer or delivery of high-grade coffee beans from one of the 20 major coffee export countries to a warehouse in the U.S or any European port.

If we analyze the Coffee commodity chart, we see the Index trades in a stable way and from the range of $110.00 to $135.00 per pound from July 2019 to the last week of December 2019. The Coffee prices saw a decline from January 2020 and dipped to the lowest values in February 2020. The highest value was $130.08/Lbs. On March 25, 2020. But the coffee prices again saw a Bullish trend since the last week of March, and the lowest value was $93.27/Lbs. On June 16, 2020. The Coffee prices currently trade at $100.90/Lbs. The Bid price is $100.80/Lbs., while the Ask price is $101.00/Lbs.

How to trade Coffee

Coffee has grown into one of the most popular commodity and an important potential investment for traders and investors to seek potential growth and diversify their portfolio. The Futures contract may be ideal for long term investors, but while investing, you should be aware of the interest rates and storage costs. CFDs and spread bets may be better for short term traders.

The Futures Contracts and Options for both Arabica and Robusta are open for trading but with slightly different timings according to a particular region.

• In London, timings for Arabica are 09:15 to 18:30, while for Robusta, it is from 09:00 to 17:30.
• In New York, the timings for Arabica are 04:15 to 13:30 while for Robusta it is from 04:00 to 12:30

The timings of CFD trading for Arabica and Robusta are different in the U.K. Both the Arabica and Robusta are traded from Monday to Friday, but timings for Arabica are 10:15 to 18:30 and for Robusta 09:00 to 17:30.

Trading coffee with CFDs you have the advantage of trading on the underlying asset, using leverage, and ability to trade Long and Short to try and profit if the market goes your way.. However risks of losing all invested capital always remain. A CFD is a contract between you and a broker, and you can profit from price difference from opening to closing of the trade. You have the benefit of trading on the underlying asset without having to buy and store the coffee. You can speculate and may profit from both the upward or downward price movement. You can go Long thinking the coffee price market will rise, and go Short predicting a fall in coffee prices.

Another way to invest in coffee is to buy shares of companies that produce or sell coffee. As coffee is in huge demand, the companies offer handsome dividends to the shareholders. Some of the popular companies for investing stocks are Starbucks, Nestle, J.M Smucker, Dunkin’ Brands, and Keurig Dr. Pepper.

What causes the price change of Coffee?

As coffee is an agricultural product, so there are numerous factors that play a significant role in determining the prices of coffee. The weather and climate of the region is an important factor that determines the quality of the coffee beans. The main economic aspect crucial to decide the price of nearly every commodity is the supply and demand of that particular commodity. Lower production of coffee beans will lead to higher prices of coffee, while higher production will decrease the price. However, in the case of coffee, the price tends to be high due to increased demand. Climate change all across the world and, in particular, in the coffee-producing regions is also a major concern for the future price movement of coffee.

• Supply factors of coffee include
  • The climate and weather changes and impact of El Nino and La Nina climatic cycles
  • The number of countries that cultivate and harvest coffee beans
  • The fruiting and flowering cycles of coffee
  • The production and investment level in major coffee-producing countries

• Demand factors for coffee
  • The constant and ever-increasing demand for coffee all over the world
  • The growing popularity of retail coffee shops
  • The prices of alternative beverages such as tea and cocoa
  • The growing availability of cheaper coffee beans

Investing in coffee as a commodity can help to diversify an investment portfolio as it is a popular fact that commodities help to hedge against inflation, and retain its value in economic crisis. The coffee market is quite volatile, with tremendous price swings and short term traders can profit or lose from the drastic price movements.

The information above is for education purposes only and cannot be considered as investment advice. Past performance is not reliable indicator of future results.