Coffee Futures Trading: A Brief Background

Coffee Futures Trading: A Brief Background

According to the International Coffee Organization, coffee is the 2nd most actively traded commodity in the entire world (this is measured by monetary volume) behind the number 1 commonly traded commodity, crude oil.

Typically, commodity production and consumption (supply and demand) tend to rise and fall based on price shifts. Coffee however, is not as prone to price shifts - people continue to drink coffee regardless of what the price is.

Types of Coffee Futures

There are two different types of coffee futures traded on two different exchanges:

1. U.S. Arabica Coffee Futures
2. London Robusta Coffee Futures (we cannot trade these futures)

Arabica Coffee Futures

Arabica coffee futures and options are traded in New York on the I.C.E.. Here are the arabica coffee future specs...

Arabica Coffee Future (/KC) Specs:
Contract size (leverage) - 37,500 lbs
Current Price - $122.15 * 
Notional Value - $45,806.25 * = ($1.2215 x 37,500)
Tick Size - $0.05 ($18.75/tick)

The arabica coffee futures contract months are: March, May, July, September, and December.

Robusta Coffee Futures

london robusta coffee futures are traded on the I.C.E. Europe. The specs for robusta coffee futures are…

Robusta Coffee Future (/RC) Specs:
Index Multiplier (leverage) - 10 metrics tons 
Current Price - $1,761 * 
Notional Value - $17,610 * = ($1761 x 10)
Tick Size - $1.00/per tonne ($10.00/tick)

The robusta coffee futures contract months are: January, March, May, July, September, and November.

Coffee Futures Trading Tips

When trading coffee, a veteran trader will tell you…

Never be short coffee going into July. Why?

There is always the looming threat of winter freezes. A freeze (or even threat of a freeze) in Brazil that could be severe enough to damage coffee trees, thus reducing coffee production (for up to several years), can have a large impact on the prices due to the fact that Brazil is dominant in the world coffee market.

Depending on the global coffee supply situation, some traders don’t short coffee after May. However, this seasonal tendency is not very strong because countries like Mexico can fill in with coffee supply.

If you trade coffee futures, you should be aware that coffee is only produced in a few countries. Therefore, it’s possible that shipments may be controlled in an effort to boost coffee prices. Similar to what happens in the crude oil market.

Coffee futures prices in the past have been relatively quiet for a number of years, but if you look at older price charts, you will see that this was not always the case. There have been several blowoff price explosions due to the supply being controlled by the exporters.

Coffee Production: Where Does All The Coffee Come From?

Most of the world’s coffee production occurs in the tropical highlands of the western hemisphere and in the low, hot areas of Africa and Asia. South/Central America produce a majority of the coffee traded in the world.

The major producers of the world’s coffee are Brazil, Vietnam, Colombia, and Indonesia. Brazil and Colombia produce mostly Arabica coffee and account for more than 40% of world coffee production. Vietnam (the number 2 producer in the world) produces Robusta coffee, which is generally considered to be a lower quality coffee than Arabica.

A coffee tree can provide enough beans to fill a 1lb can of ground coffee over the course of each growing season. It takes 3-5 years after planting a coffee tree before it can produce marketable coffee beans.

Strategies: N/A
Products Discussed In This Episode: /KC, /RC

*Values subject to change based on where the market is at

https://www.tastytrade.com/tt/shows/futures-measures/episodes/coffee-futures-trading-coffee-futures-part-1-07-28-2015