Everything You Wanted to Know About Coffee Trading

Coffee Trading

Why is Coffee Valuable?

Coffee is a soft commodity derived from a plant that grows mostly in subtropical and tropical climates.

The beverage produced from the cherries on these plants is a primary source of caffeine in diets in both emerging and developed countries.

Coffee is such an important dietary staple across the world that it has spawned a staggeringly large economy of its own. Coffee roasters, packers, growers, marketers and coffee equipment manufacturers depend on the commodity as do dairy producers and restaurant operators. Coffee commodity prices, therefore, play a vital role in the global economy.

How is Coffee Produced?

Coffee plants grow in two varieties – Arabica and Robusta. The cherry that grows on the plant contains seeds –  known as beans – that are roasted to make coffee.

Arabica plants grow in subtropical and tropical climates in both lower and higher altitudes:

Lower Altitude Crops: These crops require well-defined rainy and dry seasons and altitudes of between 1,800 and 3,600 feet. Such conditions produce distinct growing and maturation seasons. Mexico, Jamaica, some areas of Brazil and Zimbabwe are countries with these types of conditions.

Higher Altitude Crops:  These crops grow near the equator at altitudes of 3,600 to 6,300 feet. Coffee plants here require frequent rainfall and produce two harvesting seasons. Kenya, Colombia and Ethiopia are countries with these climate and geographical conditions.

Robusta plants generally grow at much lower altitudes than Arabica crops. Coffee producers plant Robusta in regions 10 degrees north or south of the equator at altitudes ranging from sea level to 3,000 feet. Robusta plants can tolerate warmer weather than Arabica plants.

Global production of coffee is measured in jute bags, which can hold 60 kg of coffee. * One-ton polypropylene super-sacks have been replacing jute bags for coffee exports. 

Coffee Jute Bags

Variety of Coffee Jute Bags – Image via Pixabay

Total global production of coffee by exporting countries exceeds 150 million jute bags annually. Arabica beans generally comprise more than 60% of the total production.

World's Biggest Coffee Producers

Over 50 countries produce coffee, but the overwhelming majority of the crop grows in ten countries:

Top 10 Coffee Producing Countries

RankFlagCountryMetric Tons per Year
#1Flag of BrazilBrazil2,595,000
#2Flag of VietnamVietnam1,650,000
#3Flag of ColombiaColombia810,000
#4Flag of IndonesiaIndonesia660,000
#5Flag of EthiopiaEthiopia384,000
#6Honduras FlagHonduras348,000
#7Flag of IndiaIndia348,000
#8Flag of UgandaUganda288,000
#9Flag of MexicoMexico234,000
#10Flag of GuatemalaGuatemala204,000

The largest importers of coffee include the European Union, the United States, Japan and Russia. Exporting countries consume about one-third of the more than 150 million jute bags consumed annually. Brazil is the largest consumer among the exporting countries.

In the United States alone the economic impact of coffee exceeds $225 billion and accounts for more than 1.6% of the country’s GDP. The coffee industry produces an estimated 1.7 million US jobs

Coffee drinkers enjoy many benefits. The caffeine in the beverage is credited with relieving fatigue and increasing mental alertness. In addition, the medical community recognizes other benefits from coffee consumption

  1. Research suggests drinking more than three cups of coffee daily may reduce colorectal cancers
  2. Coffee consumption can alleviate dizziness caused by low blood pressure
  3. Coffee consumption can delay or prevent the onset of Parkinson’s disease
  4. Research shows consuming more than 400 mg of caffeine daily can prevent gallstones
  5. Coffee consumption significantly reduces the risk of developing Type 2 diabetes

What Drives the Price of Coffee?

  1. Geopolitics
  2. Climate
  3. Discretionary Income
  4. Transportation and Oil Prices
  5. Health Issues

Geopolitics

The top five coffee-producing countries account for about two-thirds of global production, and the two largest producers – Brazil and Vietnam – often account for about half of annual production.

All of these countries have histories of political instability. Political crises such as leadership vacuums or corruption scandals can unnerve markets and create concerns about supply disruptions.

Climate

Coffee crops are highly sensitive to weather conditions.

Crops need the right combination of rainfall and sunshine to yield maximum output. When these conditions don’t materialize, supply becomes restrained and prices rise.

The fact that the bulk of coffee production is concentrated in a few countries exacerbates this problem. Global warming patterns have the potential to create long-term drought conditions in coffee-growing countries. If these patterns persist, coffee prices could head higher in the years ahead.

Discretionary Income

Although much of the world regularly consumes coffee, the beverage is not a necessary staple in the same way that grains such as wheat and rice are. Therefore, patterns in discretionary income and spending can play a significant role in moving prices.

Coffee Shop

Growing Coffee Culture – Image via Pixabay

In developed regions such as the EU and the United States, trends in unemployment and average hourly earnings could serve as important barometers for changes in coffee consumption. In emerging markets, overall economic growth could impact coffee consumption. China, for example, has shown a pattern of shifting toward Western dietary norms as its economy has matured. Although China has more tea than coffee drinkers, coffee may rival tea in the years ahead.

Transportation and Oil Prices

Coffee growers have to transport their beans to consumers and businesses across the world, and all forms of transportation require fuel. The price of oil can have a major impact on the price of coffee.

Disruptions to refinery operations can cause the price of gasoline to rise. Buyers of coffee should expect prices for the commodity to have a positive relationship with energy prices.

Health Issues

The medical community has produced conflicting evidence about the health effects of drinking coffee. Coffee enthusiasts note the beverage’s benefits for disease prevention and its numerous antioxidants including vitamins B2 (riboflavin), B5 (pantothenic acid) and B1 (thiamin). 

However, caffeine in coffee can lead to anxiety and disrupt sleep in some people. It also is an addictive substance. The extent to which the public embraces the positive or negative message about coffee could impact demand and prices for the commodity.

The US Dollar

Commodities, including coffee, are priced in US dollars. Sellers of coffee receive fewer dollars for their product when the US currency is strong and more dollars when the currency is weak. A strong US dollar can potentially depress coffee prices, while a weak US dollar is usually good for prices.

Ready to Start Trading Coffee?

Our recommended brokers for trading coffee are:

5 Reasons You Might Invest in Coffee

There are several compelling reasons traders might consider investing in coffee:

  1. Bet on Supply Scarcity
  2. Bet on Global Growth
  3. Bet on Improving Health Story
  4. The Starbucks Effect
  5. Portfolio Diversification

Bet on Supply Scarcity

Coffee has its source of supply concentrated heavily in a few countries. Since coffee growing requires the right climate and financial resources, this concentration is unlikely to change anytime soon. Conditions such as climate change and political upheaval have the serious potential to disrupt the supply of the crop and send prices higher.

Bet on Global Growth

As a discretionary item, coffee benefits from strong global economic growth.

Investors optimistic about growth in emerging economies in Asia, Latin America and Africa may want to invest in coffee. As these countries accumulate wealth, their consumption of coffee is likely to increase. Similarly, investing in coffee is a way to bet on growing discretionary income in Western economies.

Bet on Improving Health Story

Medical evidence paints an increasingly favorable picture of the health benefits of consuming coffee. If more medical evidence emerges about these benefits, then consumer behavior may shift toward greater consumption.

The Starbucks Effect

Consumers increasingly see coffee shops as fun and productive places to congregate. Business professionals, students and civic groups perform work and hold meetings in them. As coffee shops proliferate in popularity, coffee consumption should benefit.

Starbucks Effect

The Starbucks Effect – Image via Pixabay

Portfolio Diversification

Most traders have the vast majority of their assets in stocks and bonds. Investing in coffee is one way to diversify a portfolio.

Should I Invest in Coffee?

Coffee prices can be very volatile, so traders should take that into account when deciding whether or not to invest.

An investment in coffee might make sense as part of an overall plan to allocate some assets into commodities. Commodities provide traders with protection against inflation and a declining US dollar. They also provide traders with asset diversification.

There are three compelling long-term trends that could boost coffee prices specifically:

  1. Global climate change: Coffee might be a way to profit from long-term shifts in weather patterns. Increasingly hot temperatures and unpredictable hurricane seasons could create upheaval in the production of many crops including coffee.
  2. Emphasis on Healthy Living: Studies in the medical community continue to show more benefits from coffee consumption. This news has the potential to convert more individuals into coffee drinkers and drive coffee prices higher.
  3. Emerging Market Growth: Rising wages in emerging economies have the potential to transform consumption patterns. Discretionary items such as coffee could be the beneficiaries of this trend.

However, coffee investing has several risks as well:

  1. A strong US dollar could drive prices lower
  2. Overproduction by large suppliers could depress prices
  3. Economic weakness, in general, could curb consumers’ appetite for coffee

What Do the Experts Think About Coffee?

Experts see favorable supply/demand fundamentals boosting coffee prices. They see weak harvests of Arabica beans and increasing demand for high-end gourmet coffee as the drivers of this trend.

Expert Opinions on Coffee

We expect prices to hit further highs on production downgrades, the decline in global stocks and supply tightness that should keep markets fearful of any disruptions.

-Sudakshina Unnikrishnan, commodities analyst at Barclays Capital.

James Hearn, co-head of agriculture at commodities broker Marex Spectron, agrees. He believes that low Arabica prices fail to take into account the impending shortage.

It’s a material deficit; everyone can see there’s a problem coming.

-James Hearn, co-head of agriculture, Marex Spectron

Hearn notes that crop conditions in Brazil and tight demand have the potential to lift prices much higher. He points to the Brazilian government’s sale of its supply, which was met with strong market demand.  As government supplies get depleted, the potential for higher prices increases. 

How Can I Invest in Coffee?

Coffee traders have several ways to invest in the commodity:

Coffee Trading Methods Compared

Method of InvestingComplexity Rating (1 = easy, 5 = hard)Storage Costs?Security Costs?Expiration Dates?Management Costs?

Leverage?

Regulated Exchange?
Coffee Futures5NNYNYY
Coffee Options5NNYNYY
Coffee ETFs (ETNs)2NNNYNN
Coffee Shares2NNNNYY
Coffee CFDs3NNNNYY

Coffee Futures

The New York Mercantile Exchange (NYMEX), which is part of the Chicago Mercantile Exchange (CME), and the Intercontinental Exchange (ICE) offer the Coffee C futures contract, which is the world benchmark for Arabica coffee.

The Coffee C contract settles into 37,500 pounds of Arabica beans. The CME contract trades globally on the CME Globex electronic trading platform and has expiration months of March, May, July, September and December.

Futures are a derivative instrument through which traders make leveraged bets on commodity prices. If prices decline, traders must deposit additional margin in order to maintain their positions. At expiration, the contracts are financially settled on the NYMEX, but physically settled on the ICE.

Investing in futures requires a high level of sophistication since factors such as storage costs and interest rates affect pricing. 

Coffee Options on Futures

The ICE offers an options contract on the Coffee C futures contract.

Options are also a derivative instrument that employs leverage to invest in commodities. As with futures, options have an expiration date. However, options also have a strike price, which is the price above which the option finishes in the money.

Options buyers pay a price known as a premium to purchase contracts. An options bet succeeds only if the price of Coffee C futures rises above the strike price by an amount greater than the premium paid for the contract. Therefore, options traders must be right about the size and timing of the move in Coffee C futures to profit from their trades.   

Coffee ETFs

These financial instruments trade as shares on exchanges in the same way that stocks do. An ETN is similar to an ETF except that instead of holding the assets in a fund, it pays traders returns on the portfolio of assets. In this sense, it is more like a bond. There are two popular ETNs that invest in coffee futures:

Top 2 Coffee ETFs

iPath Dow Jones – UBS Coffee ETNiPath Pure Beta Coffee ETN

Shares of Coffee Companies

There are few pure-play public companies engaged in the production and sale of coffee. Most coffee producers are small and privately-owned. Investors could purchase shares of one of India’s largest coffee producer Tata Coffee Ltd (TCO.IN).  

Coffee CFDs

One way to invest in coffee is through the use of a contract for difference (CFD) derivative instrument. CFDs allow traders to speculate on the price of coffee. The value of a CFD is the difference between the price of the shares at the time of purchase and the current price.

www.plus500.comOpening an Account with Plus500

Many regulated brokers worldwide offer CFDs on coffee. Customers deposit funds with the broker, which serve as margin. The advantage of CFDs is that trader can have exposure to coffee prices without having to purchase shares, ETFs, futures or options.

Plus500 logo

One of the leading brokers for trading agricultural commodities, like coffee, is Plus 500. Here’s why:

  • No commission on trades (other charges may apply)
  • Free demo account
  • Easy-to-use (mobile-friendly) platform
  • Industry-leading risk management tools
  • Trade coffee and hundreds of other markets
  • Your funds are safe – publicly listed company regulated by the UK’s Financial Conduct Authority and Cyprus’ Securities and Exchange Commission

Start Trading at Plus500.com Important: Your capital is at risk. CFD services are suitable for experienced traders only.

Further Reading

Lawrence Pines is a Princeton University graduate with more than 25 years of experience as an equity and foreign exchange options trader for multinational banks and proprietary trading groups. Mr. Pines has traded on the NYSE, CBOE and Pacific Stock Exchange. In 2011, Mr. Pines started his own consulting firm through which he advises law firms and investment professionals on issues related to trading, and derivatives. Lawrence has served as an expert witness in a number of high profile trials in US Federal and international courts.