Coffee Futures

Coffee is the fourth most-popular drink in the world, after water, tea, and beer, and is one of the most widely-traded futures in the market today.

Coffee is widely grown and immensely popular. There are two main types of coffee: arabica and robusta, with arabica being the most popular type and the one used in coffee futures contract. Roughly 7.8 million tons of coffee were produced in 2009, and consumption has steadily risen for years. Futures allow you the chance to profit off coffee production and leverage a relatively-small amount of money into big profits – if you make the right decisions, that is.

Here, I’ll give you a synopsis of trading coffee futures. We’ll talk about coffee futures prices, what factors impact the value of coffee, and how you can position yourself for better results.

Coffee Futures History

As far as commodities go, coffee is very volatile. It’s not uncommon to see steep price changes over a period of weeks, days, or even hours. Much of this is due to coffee’s nature as a commodity that is grown widely and is vulnerable to weather, political disruptions, increases in the price of oil (which impact the cost of shipping coffee), and the distance between suppliers of coffee and its major consumers, which are typically located on the other side of the globe in North America and Europe.

The largest producer of coffee is Brazil, followed by Vietnam and Indonesia. Coffee is the second-most traded commodity in the world, behind only oil. Consumption of coffee on a global scale has risen gradually from 6.7 million tons of coffee in 1998 to 7.8 million tons in 2009.

Because coffee is a crop, it is subject to weather disruptions such as drought (coffee is a very thirsty crop) and monsoons/typhoons in Southeast Asia. These weather disruptions influence the cost of coffee. During the summer months of December, January, and February in the Southern Hemisphere, where most of the world’s coffee is grown, coffee future prices tend to rise because weather conditions – like freezes – threaten global supply. In Brazil, for example, coffee is annually threatened by freezing and undergoes a significant freeze usually once every five years or so.

Coffee is a purely consumer-oriented product, so whenever economic conditions drive down consumption, coffee values take a hit. This was the case in 2008 and 2009 with the global recession; otherwise, coffee prices have been on the rise. The coffee futures price chart below shows the progression of coffee from January, 2012 to today:

Going back further to January, 1992, you see even more volatility:

coffee price chart

Finally, going all the way back to January, 1972, one can see the extreme spikes and dips in the value of coffee over the past four decades:

Demand has steadily increased since 1972, which has helped to drive up the price. Also, oil has gotten more expensive, which further adds to price increases since that raises the cost of shipping coffee to its end-user consumers.

 

Factors working against coffee value include more suppliers coming into the market – such as the emergence of Vietnam in the 1990’s as a major player – and innovations in developing and producing coffee that made it cheaper.

Trading Coffee Futures

The old adage is to “Never be short coffee going into July”. Why? The reason is because July, for the Southern Hemisphere, represents the peak of winter. Winter brings the threat of freezes, and if one hits Brazil or another southern producer of coffee, the price of coffee will rise as a result.

Contract Specifics

As mentioned, when we talk about coffee futures we are talking about arabica coffee. Coffee futures are sold on two major exchanges: the New York Mercantile Exchange (NYMEX), and the IntercontinentalExchange (ICE). The coffee futures symbol for NYMEX is KT; the symbol for ICE is KC.

Listed Contracts: March, May, July, September, December

Price Quotation: U.S. currency per ounce

Minimum Price Fluctuation: $0.0005 per pound ($18.75 per contract)

Trading Hours for NYMEX

Sunday – Friday 6:00pm to 5:15pm

Trading Hours for ICE

3:30am to 2:00pm (pre-open 8:00pm)

Contracts are for 37,500 pounds of coffee and require margin accounts. For NYMEX, initial margin is $4,950 per contract beginning in the month of September, 2012. Maintenance requirements are $4,500 per contract. For ICE, initial margin is $4,290 per contract; maintenance margin is $3,900.

Mini contracts are no longer available for coffee on any major exchange. They were formerly listed on ICE, but were delisted in 2007. Some information on the internet may be outdated and erroneously refer to these contracts that no longer exist.

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