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How To Trade Coffee Futures

What Are The Coffee Markets

Tips for Trading Coffee Futures

The two main types of coffee are Arabica and Robusta.Arabica is considered the premium, more flavourful option of the two and is therefore more expensive, with beans selling for between US$2.60/kg and US$3/kg in recent times.It makes up about 60 per cent to 70 per cent of all coffee production and mainly comes from Brazil and Colombia.Robusta, on the other hand, can thrive in lower altitudes and hotter climates , and has a more earthy and bitter taste than Arabica, as well as a higher caffeine content.Robusta beans, which are mostly grown in Vietnam, have traded for between US$1.50 and US$2 in recent times and make up about 30% of the coffee bean market.When it comes to actually consuming the beans, the United States makes up 18.5 per cent of total coffee imports, followed by Germany and France .

âGlobal production of coffee is measured in jute bags, which hold 60kg of coffee.â

Ice Coffee C Futures: Background And Specs

Aside from crude oil, beef, pork, corn, and soybeans, coffee is one of the most sought-after commodities in the world. In fact, for 2020/2021, people consumed nearly 10 billion kilograms of coffee globally.

Coffees robust consumption requires an unfettered supply chain and massive production to satisfy strong ongoing demand. Accordingly, coffee futures offer both speculators and hedgers an opportunity to secure market share.

The premier coffee futures contract in the world is Coffee C listed on International Exchange . ICEs Coffee C is considered to be the global benchmark for the pricing of Arabica coffee, which accounts for more than 60 percent of aggregate consumption. Although Arabica coffee beans originated and are grown in Ethiopia, Brazil is now the worlds leading producer and exporter. Leading importers of Arabica are the United States , Germany , and France .

Here are the contract specs for ICE Coffee C futures:

Contract Name
Cents and 1/100th of a cent up to two decimal places
Contract Months
Minimum Tick
Beans are classified as either premium or discountin comparison to an established basis grade.

Choose A Contract To Trade

There is a temptation to become a jack of all trades, master of none. However, most of the time, it is better to focus on one market and one type of futures contract . In time you will very often find that the skills/experience gained are actually transferable to other markets and other investments. For this case, let us look at the S& P 500 Index, where we have both the original futures contracts and the E-mini S& P 500 Index futures. The value of these futures contracts is very different:-

S& P 500 Index futures contract: 3,272.97 x $250 = $818,242.50

E-mini S& P 500 Index futures contract: 3,272.97 x $50 = $163,648.50

It also makes sense to take the margin requirements on different futures contracts into account. This will determine your investment outlay and overall strategy. So, choose an investment market that interests you and futures contracts that you can afford. Now for the fun part..

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Leave Your Ego At The Door

Futures contracts move so quickly, flipping your investment from positive to negative, negative to positive, in just a few seconds. Follow the money, protect your funds, and leave your ego at the door. Fear and greed are the two most dangerous emotions traders, especially those looking towards futures contracts, can ever face.

Active Trading In Coffee

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It is obviously very impractical to have bags of coffee delivered to your home. Buying all the packs of coffee in the local supermarket is also impractical.

Fortunately, there are practical ways to invest in coffee. Trading in coffee is usually done using derivatives.

Derivatives are contracts on, for example, a commodity in which you only trade in the underlying price and not in the commodity itself. That way, you dont have to worry that kilos of coffee will be delivered to your house.

You can trade these contracts or CFDs with an online broker. A good online broker to trade coffee with is PIus500. PIus500 is a broker where you can trade CFDs on all major commodities. You even have the possibility to take a short position with this broker. When you take a short position on coffee you obtain a positive result when the price of coffee drops. This makes it possible to benefit from trading coffee in any market situation.

You can try trading in coffee entirely risk-free with a demo at PIus500. Use the button below to open a free demo instantly:

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Advantages Of Futures Contracts

Unlike equities, futures contracts can be shorted on a downtick, which gives market participants greater flexibility. This flexibility allows hedgers to protect their physical position and speculators to take a position based on market expectations.

Because the soft commodity markets are traded at an exchange, the clearing services ensure no default risk. This means that the exchange acts as buyer to every seller should a market participant have to default on its responsibilities.

How To Play The Coffee Market

Trading Coffee Futures

Trading coffee futures contracts is the best way to play the coffee commodity market. Coffee C futures contract, which is the benchmark for Arabica species of coffee, trade on the ICE and the New York Mercantile Exchange , a member of the Chicago Mercantile Exchange . The contract can be traded from any part of the world on the CME Globex electronic platform.

One Coffee KC contract is equivalent to 37,500 pounds of Arabica coffee beans, and it normally expires in the months of March, May, July, September, and December. On the NYMEX, the contracts are settled with cash at expiration, while on the ICE, they are settled by physical delivery.

The futures market gives you the opportunity to trade with leverage. With a small initial deposit, you can carry a big contract. There are other ways to trade coffee, such as coffee options, coffee ETFs, and coffee CFDs, and they differ from futures trading in the following ways.

Comparing coffee futures contracts with other methods of trading coffee

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Why Trade Coffee Futures Contracts

While other agricultural commodities can offer good trading opportunities, there are many reasons some traders prefer to trade coffee futures contracts:

Increasing demand: As world economies grow, especially the emerging economies in Asia, South America, and Africa, there will be more people using coffee to maintain alertness during working hours. Additionally, studies are showing some health benefits of drinking coffee, which can make people consume more coffee. Moreover, the proliferation of coffee shops like Starbucks can only lead to an increase in coffee consumption. So, the demand for the commodity will likely keep increasing, adding more liquidity in coffee futures contracts.

Potential supply scarcity: Only five countries account for more than 65 percent of the worlds coffee beans supply. Adverse weather conditions or political instability in any of those countries could affect coffee production, leading to a price increase.

Diversify portfolio: As with other agricultural commodities, investors and fund managers use coffee to spread their risk exposure across many asset classes. In diversifying their investment portfolio, they to reduce their market risk.

Inflation hedge: Coffee is one of the commodities that can be used to hedge against inflation since its value tends to increase when there is inflation. It is better to have the commodity than to keep dollar notes, which depreciates with rising inflation.

Coffee Is A Basic Product

Trade Coffee Futures using an Algorithmic Trading System

Coffee is seen by many people as a basic product. Because of this, even in economically bad times, there is a great demand for coffee. In large parts of the world, coffee is seen as the perfect drink to start the day with. As a result, the price of coffee will never approach zero. Therefore, a long-term investment in coffee does not have to be very risky.

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Investing In Coffee: Coffee Futures Contracts

Commodities Trading Coffee Prices & Rates. Coffee is the second most commonly traded commodity in the world , trailing only as a source of foreign exchange to developing countries, according to the International Coffee Organization. While production and consumption of many commodities tend to rise and fall based on price, shifts in coffee supply and demand are not so prone to price changes as people continue to look for their morning cup of coffee at whatever the price is. An important distinction for coffee futures traders is that two different types of coffee are traded on the worlds exchanges.

Trading The Soft Commodity Markets

    The soft commodities markets are made up of perishables such as cocoa, coffee, cotton, orange juice, and sugar, which are also some of the oldest tradable commodities still around today. You can trace their roots in commerce back over thousands of years. It is important to note that trading in this market involves substantial risks and is not suitable for everyone, and only risk capital should be used. In this article, we’ll show you how to use this “sweet” market properly, because any investor could potentially lose more than originally invested.

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    How To Invest In Commodities

    There are several ways to invest in commodities, including just buying and owning them directly.

    If you want to invest in gold, for example, purchasing a few gold coins from a local dealer is easy enough.

    The difficulty lies in owning unwieldy commodities like natural gas or livestock. Very few people have the space to store hundreds of barrels of oil or to house a herd of cattle.

    Thankfully, there are three practical methods for average investors to invest in commodities.

    What Are The Most Popular Futures To Trade

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    The introduction of the E-mini S& P 500 Index was a stroke of genius. It quickly rocketed to becoming the most popular futures contract on the market. It is essentially a slimmed-down version of the original S& P 500 Index. The E-Mini S& P 500 Index futures contract is a mere 20% of the full contract. That fact makes it much more affordable to the average retail investor. Other popular futures contracts include Treasury notes, crude oil, gold, and various currency exchange rates.

    Then we have the commodities markets covering agriculture, energy, and various precious metals. These include coffee to corn, gasoline to natural gas, silver to copper, and much more!

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    Trading Coffee Futures Explained

    Now we better understand the types of coffee which are traded on the commodities markets and what a futures contract is, lets put the two together and look at coffee futures contracts.

    It is possible to trade futures contracts on both arabica and robusta coffee beans.

    As we mentioned in the previous section, futures contracts are standardised depending on the underlying asset and the exchange where it is bought and sold. This means that the mechanics of trading coffee futures on arabica and robusta are different.

    Introduction To Online Coffee Trading

    Coffee is known as a âsoft commodityâ â an agricultural product which is grown rather than mined. These types of commodities have an important role in the futures market in particular and are traded on the Intercontinental Exchange in the US, where coffee options can also be traded. With more than 2.25 billion cups of coffee consumed in the world every day, this commodity is one of the most popularly traded across the world.

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    Are Coffee Futures Relevant For Coffee Roasters

    The average specialty roaster probably isnt trading coffee futures. However, having a fundamental understanding of the market is crucial. Knowing what is happening in the futures market is a great tool you can use to protect your small business.

    Think of the futures price as a barometer for your decision making. Is the market down? Well, it probably means there is a decent amount of supply in the market. Does the market look like its heading up? Maybe think about booking coffee forward to protect your costs.

    But take note, this is not trading advice. As a coffee importer, we just want to make you aware of the mechanics to make the decision thats best for you. Now back to the inner workings of the market.

    What Are Coffee Futures

    Coffee Futures and Options Video

    The New York Mercantile Exchange , which is part of the Chicago Mercantile Exchange , and the Intercontinental Exchange 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.

    How Do Coffee Futures Work?

    Futures are a derivative instrument through which investors 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.

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    History Of Coffee Trading

    The International Coffee Organization produces statistics on international coffee production and shipments and promotes coffee trading among nations. Based in London, the ICO consists of 55 coffee producing and consuming member countries and makes available a great deal of data and other information to coffee futures traders.

    The Foreign Agricultural Service of the U.S. Department of Agriculture also offers a wealth of coffee information and statistics, including production data by country and for the world, import and export data, etc. The various exchanges that trade coffee futures also have lots of information.

    Delivery Points And Growth Locations

    According to the Intercontinental exchange, there are approximately 20-growth locations that can be delivered to a regulated warehouse. These include Mexico, Salvador, Guatemala, Costa Rica, Nicaragua, Kenya, Papua New Guinea, Panama, Tanzania, Uganda, Honduras, and Peru all at par, Colombia at 400-point premium, Burundi, Rwanda, Venezuela and India at 100 point discount, Dominican Republic and Ecuador at 400 point discount, and Brazil at 600 point discount. These growths can be delivered to regulated exchange warehouses that are licensed in the ports of New York District, Virginia, New Orleans, Houston, Miami, Bremen/Hamburg, Antwerp, and Barcelona.

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    What Are The Different Coffee Varieties

    There are two different coffee varieties Arabica and Robusta. Arabica is considered the premium, more flavourful bean, so it attracts a higher market price. Robusta has a bitter flavour and contains more caffeine. Trend followers like to trade Arabica as it has more stable pricing, while traders who prefer to trade volatility lean towards Robusta.

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    Coffee Futures Update: Trading Price Targets And Time ...

    If java gets you jittery to trade, you’ve got coffee futures to make a play on the factors affecting worldwide coffee markets. A host of factors could be impacting coffee prices at any time: weather could threaten coffee growth, trade embargoes could be lifted or imposed, transportation costs could skyrocket. Any combination of external events can jack up or send coffee into a downward spiral. Keeping up with these events is critical to any coffee futures trading program, as is a profit target and clearly defined entrance and exit strategies.

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    The Exception To Coffee Futures Ethiopia

    Of course, it would be remiss of us not to mention Ethiopia. Ever the unique origin, coffee is seldom offered by exporters on a differential basis in Ethiopia. The Ethiopian monetary system prohibits local exporters to hedge their risk by trading futures.

    Instead, we see outright price offers, meaning the futures price has a limited impact on price discovery. Furthermore, specialty coffees in Ethiopia tend to be high above the standards of the grades tenderable to the NY exchange.

    Considerations For Trading Coffee Futures

    Weather Events:

    The opposite effect occurs when berries are ripening, and harvesting begins. These seasons need less rainfall and higher temperatures for the best yields. Heavy rainfalls can delay harvesting, which often lowers the production volume and raises prices. In addition, certain weather patterns can increase the occurrence of coffee leaf rust, which can affect output for years to come.

    This means that traders in coffee futures should keep their eyes on weather conditions in major coffee-producing regions to be able to project the effect on production volumes and the ultimate impact on future prices.

    Demand for Coffee:

    According to Centre for the Promotion of Imports , a Netherlands-based organization that contributes to sustainable economic development around the globe, coffee consumption in the EU is expected to stabilize over the coming years, but it may go up in the US because of increasing consumption by younger generations.

    China is another large market thats developing a taste for these magic beans. Starbucks already has more than 4,500 company-operated stores in the country.

    Increasing demand in any of these markets will put more pressure on prices. Prudent traders in coffee futures will develop a knowledge for the effects of changes in supply and demand on coffee prices. For example, production volumes may drop in Brazil because of adverse weather conditions, but outputs may increase in Colombia and Vietnam.

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    Practice With Paper Money

    So, you have considered the individual characteristics of brokerage/prop trading firms, researched economic events that will impact your investments, looked into technical analysis, risk management, and eventually built yourself a trading plan. First, choose your market and the type of contracts which interest you/fit with your investment strategy. After that, it is time to practice with paper money!

    The key to maximizing the benefits of practicing with paper money is to stay true to your trade plan, trading strategies, and attitude to risk. The moment you consider this is just paper money is when you need to walk away from futures trading rethink your outlook and suitability for investing/trading futures contracts. This is the perfect environment to learn from your mistakes. Learn to read markets and feel the connection with a profit as well as a loss.

    If you decide to run The Gauntlet, it will monitor your performance as if these were market trades. This is not the environment to take one huge risk for the sake of one huge return. Contrary to popular belief, futures trading is not all about taking these major risks. There is an obvious balance between a conservative and a speculative trader. There are times to be cautious and other times to be more adventurous. Ultimately whatever decision you make, you need to be in control.

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