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If you are making your first steps in trading commodities, you might be interested in operating coffee shares. It’s crucial to understand that this is a huge sector with a multi-billion capitalization that has been evolving over the years. In this guide, we will review the peculiarities of coffee trading for you to get a deeper insight into this field.
Investment method | Trading Complexity | Storage Expenses | Security Expenses | Expiration Dates | Management Costs | Leverage | Regulated Exchange |
Coffee Futures | Hard | - | - | + | - | + | + |
Coffee Options | Hard | - | - | + | - | + | + |
Coffee ETFs | Easy | - | - | - | + | - | - |
Coffee Shares | Easy | - | - | - | - | + | + |
Coffee CFDs | Medium | - | - | - | - | + | + |
The Coffee C futures contract, which is the global benchmark for Arabica coffee, is presented on three major exchanges:
Each Coffee C contract involves trading of 37,500 pounds of Arabica coffee beans. The CME contract is traded on the CME exchange and has expiration in different months.
This type of trading is used by proprietary traders and hedging experts. Futures are also traded by corporate clients that want to reduce risk on the physical markets. However, this type of trading requires experience because it’s more sophisticated and coffee prices depend on a multitude of factors, including harvest, growing rates, and storage expenses.
Futures are derivatives allowing investors to earn by betting on commodity prices. When the cost reduces, traders need to deposit an extra margin to keep their positions. Upon expiration, contracts are settled on NYMEX (financially) and the ICE (physically).
The ICO also provides an options contract on the Coffee C futures. Those are derivative instruments, too, but allow for using leverage to trade physical commodities. Like coffee including futures, options also come with an expiration.
What’s the difference then? Options have a strike price (the cost above which the option ends in the money). Thus, coffee traders should predict the right size and timing of the Coffee C futures move to make a profit.
This trading tool is similar to an ETF with one difference: instead of keeping the assets in a fund, an investor gets returns from the portfolio of his assets. It works more like a bond. For trading coffee, there are two widespread ETNs:
There are not so many public companies specializing in the production and sale of coffee - the majority of producers are private and small firms. Some of the most well-known companies of this scale include Tata Coffee LTD (TCO.IN), Starbucks (SBUX), J.M. Smucker (SJM) and others. Retail investors usually buy such shares for the long term.
CFDs (Contracts For Difference) are one of the easiest ways to trade coffee. This is a type of an agreement between a broker and a trader for the latter to earn profit from price difference between opening and closing the trade. The value of a CFD is the difference between the price of the shares at the time of the purchase and the current cost.
By purchasing a CFD, you don’t buy the underlying asset itself - you only purchase the underlying contract. Thus, investing in coffee CFDs saves your time and frees you from physical manipulations with the commodity.
Besides, with CFD trading, you can bet on both price upward and downward movements. All you need is to make the right predictions. You can enter a long position if you are sure that the coffee price will rise, or make a short-term investment.
Trading coffee comes with a few risks:
Your trading style should be based on personal preferences and chosen tools. Here, you have several options: follow trending markets, consolidating markets and price fluctuations.
When coffee price keeps closing higher lows, or lower lows, it should be caught in a trend. Traders should figure out this trend and match the approach. To define a trend, they can find such indicators as the MACD and moving averages on a price chart - that allows defining the right entry and exit points.
Consolidating market is a period when support and resistance levels stay pretty much the same, i.e. there’s no clear upward or downward trend. In this case, traders use historical levels of support and resistance to define entry and exit points in a certain price range.
This strategy involves buying coffee at predictable support levels and selling it at the point of resistance making profit from short-term market movements.
Since the coffee market is extremely volatile because it is a commodity, there is a myriad of factors impacting the price of this product, including weather changes. To trace these fluctuations correctly, traders use different patterns and technical indicators.
For example, when coffee price becomes less volatile, the Bollinger Band indicator would form a tighter passage. At the same time, it might be a pending sign of the upcoming rise in volatility. Some traders wait for the sudden breakout of the Bollinger Band.
Although there are a bunch of trading strategies and instruments, you should mind that coffee cannot be traded 24/7. The ICE offers several trading sessions for coffee futures and options:
Coffee Type | Location | Trading schedule |
Arabica | New York | 4.15 AM - 1.30 PM (New York time) |
Robusta | New York | 4.00 AM - 0.30 PM (New York time) |
Arabica | London | 9.15 AM - 6.30 PM (UK time) |
Robusta | London | 9.00 AM - 5.30 PM (UK time) |
Arabica | Singapore | 5.15 PM - 2.30 AM (Singapore time) |
Robusta | Singapore | 5.00 PM - 1.30 AM (Singapore time) |
Seasoned traders provide the following recommendations for those who want to make profit on coffee shares and futures contracts:
Please, note that many traders sell coffee after May before the winter season in the Southern Hemisphere. The seasonal impact is hard to overestimate.
Coffee is a very popular commodity around the world - its market is worth over $100 billion. Here are a few characteristics of the coffee industry in general and this soft commodity in particular.
There are two major sorts of coffee traded globally: Robusta and Arabica. They differ by various factors - each can impact the price. Let’s review their differences.
Coffee grows in over 50 countries - this plant is met in tropical and sub-tropical climates (this is called the ‘coffee belt’). The largest producers are Brazil, Vietnam and Colombia.
Country | Production in 2020 (Million 60-kg Bags) | Total Market Share |
Brazil | 63.4 | 37.4% |
Vietnam | 29.0 | 17.1% |
Colombia | 14.3 | 8.4% |
Indonesia | 12.0 | 7.1% |
Ethiopia | 7.3 | 4.3% |
Depending on the sort of coffee, they can grow in different altitudes: higher - in Ethiopia and Colombia, lower - in Mexico and Brazil.
Curiously, countries that import and consume much coffee are far from the ‘coffee belt’. The total import is higher in countries with the most prosperous economies:
Since coffee is a commodity, there’s a multitude of factors affecting its cost and demand. It applies to both Arabica and Robusta.
Here’s how prices can be impacted:
Sometimes, coffee prices are affected even by unobvious factors, for example, the population’s focus on healthy living. Scientific studies show the benefits of coffee consumption, which stimulates the demand and makes prices grow.
Commodity exchange is still a popular and efficient method of making passive income. Coffee is one of the best options because it can be traded in different ways - stocks, CFDs, futures, ETNs - each with a certain difficulty level and entry threshold. All you need is to choose suitable trading instruments and mind all the factors impacting the price of coffee.
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