Coffee Explained: An Introduction to Coffee Trading

The significance of coffee extends beyond its status as a popular beverage. In terms of commodity export volumes by developing countries, coffee remained second to crude oil in 2023.

Therefore, it is important to understand the role of coffee in the financial markets, including its supply and demand dynamics, and various financial instruments.

Main Points:

• The two primary types of coffee produced and consumed are Robusta and Arabica coffee.
• Coffee is mostly produced in Brazil and mostly consumed in Europe.
• Factors affecting the supply and demand of coffee can influence coffee prices.
• Market participants can gain exposure to coffee prices by trading its financial derivatives such as futures contracts, contracts for difference (CFDs), exchange-traded funds (ETFs), and more.

What Is Coffee?

Coffee is a beverage made from roasted, ground seeds of coffee plants. These plants are evergreen, grow in tropical regions and are a source of an endless variety of beverages like espresso, cappuccinos, mochas, and lattes.

Similar to other agricultural products like cocoa, cotton and soybeans, coffee is also classified as a soft commodity. Every single day, approximately 2.25 billion cups of coffee are consumed worldwide. This voluminous production and widespread consumption testify to its global popularity and substantial trading volume.

What Are the Different Types of Coffee Beans?

Similar to crude oil, coffee has distinct varieties and is categorised based on unique bean properties, as illustrated in the table below. However, among the various types of coffee, robusta and arabica dominate global coffee production and consumption.

What Is Robusta Coffee?

Robusta coffee lives up to its name. The mnemonic ‘Robust’ portrays the bean's resistance to pests and adaptability to diverse climates around the world. It contributes 30% to 40% of coffee production in the world.

What Is Arabica Coffee?

This variety is widely considered superior in taste and quality. Hence it not only claims a 60% share of global production but also commands a premium price.

Where Is Coffee Mostly Produced?

Coffee is a geographical product cultivated in countries located within the “coffee belt”. This region is prevalent in tropical and subtropical climates. So depending on the type of coffee bean, they thrive in different altitudes and temperatures.

According to the World Atlas, the following table provides information about the volume of coffee in the top 5 countries.

Where Is Coffee Largely Consumed?

One notable fact about coffee is the geographic disconnect between consumption and cultivation. While the "coffee belt" provides the ideal growing conditions, it is mostly wealthier nations, far from these regions, that import and consume the largest quantities of coffee.
According to the International Coffee Organisation (ICO), the amount of coffee consumed in millions of 60-kilogram bags for the years 2021/22 and 2022/23 respectively is provided in the table below.

What Are the Factors Affecting the Price of Coffee?

The price of coffee is influenced by supply and demand on a global scale. Factors determining the levels of coffee supply and demand are as follows:

1. Weather Conditions

Weather conditions have a profound impact on coffee production and prices. Ideal weather provides ground for healthy crop production and increased supply which can potentially lower coffee prices. Given that 65% of global coffee production occurs in just five countries. The susceptibility of these coffee-producing regions to adverse weather, such as drought and frost in Brazil or excessive rain in Colombia, can result in an increment in prices if supply is negatively impacted.

2. Varieties

Despite their distinct flavours, Arabica and Robusta coffee beans are considered close varieties. Therefore, changes in the supply or demand of one type can impact the other. For instance, if supply constraints are affecting Arabica coffee, its price may increase and lead to increased demand for the more affordable Robusta beans. As a result, the price of Robusta coffee may also rise in response to heightened demand.

3. Plant Disease

The robusta coffee comes from a much more resilient plant compared to arabica coffee. Therefore, arabica coffee plants are often challenged with reduced yield by harsh weather conditions or plant diseases. For example, in 2013, global coffee prices rose sharply after an outbreak of coffee leaf rust affected most of Central America’s coffee production. This vulnerability highlights the importance of considering potential risks associated with coffee arabica.

4. Political Instability

The vulnerability of coffee production to political instability is evident in its significant reliance on developing countries, especially in South America, where over 90% of production takes place. Any sign of political instability in these regions can have immediate repercussions on the coffee futures market because it is very sensitive to any indications of social unrest.

5. The “Big Four”

The major organisations worldwide that account for the purchase of approximately 50% of the world's coffee production are Nestle, Kraft, Procter & Gamble, and Sara Lee. This massive buying power gives them significant influence over coffee prices such that even small changes in their coffee purchases can result in noticeable fluctuations in coffee prices.

6. Currency Fluctuations

Currency fluctuations can pose significant risks to coffee prices. For instance, since coffee is denominated in US dollars, a stronger dollar can make coffee more expensive for buyers in other currencies.

A Look at Major Coffee Futures Markets

Coffee futures contracts are traded on several exchanges around the world, with some specialising in specific bean types:

Exchanges Specialising in Robusta Coffee

• Singapore Commodity Exchange (SGX) - Primarily deals with Robusta futures.
• Euronext exchange - Offers Robusta coffee futures contracts.

Exchanges Specialising in Arabica Coffee

• Brazil's Commodities and Futures Exchange (BM&F) - Deals primarily with Arabica futures.

Exchanges Specialising in Both Arabica and Robusta

• Tokyo Grain Exchange (TGE) - Offers futures contracts for both Arabica and Robusta coffee.
• In the US, the New York Mercantile Exchange (NYMEX) and the Intercontinental Exchange (ICE) provide futures contracts for both Arabica and Robusta coffee.

The Intercontinental Exchange (ICE) is widely recognised as the most reputable futures market. It presents the following contract specifications for robusta and arabica coffee:

How to Trade Coffee

There are several financial instruments linked to coffee prices, offering volatility and price swings for traders looking to speculate on its price movement. To gain exposure to coffee prices, traders may consider the following:

• Trading Coffee Futures
• Trading Coffee Options
• Trading Coffee CFDs
• Trading Coffee-related Shares
• Trading Coffee ETFs

Trading Coffee Futures

Coffee futures are derivative contract agreements between two parties to exchange an underlying asset at a predetermined price on a fixed date in the future. This contract agreement is often used by businesses, producers and consumers to hedge against the rise or fall of coffee prices.
As the expiration date of the contract approaches, market participants have the option to choose between cash settlement, receiving physical delivery of the coffee, or rolling over their positions to the next trading month. Usually, contracts are financially settled on the NYMEX and physically settled on the ICE.

Trading Coffee Options

Another type of instrument used for trading coffee futures is options contracts. Coffee options grant the buyer the right, without being required, to choose either the delivery of coffee or cash settlement upon expiration. Some traders utilise coffee options to mitigate potential losses since they cannot lose more than the initial premium paid to initiate the position.

Trading Coffee CFDs

Despite the options for margin trading in the futures market, the sizable standard contract size of coffee futures may deter smaller commodity traders, especially retail traders. However, contracts for differences (CFDs), which are also margin-traded instruments, offer accessibility and flexibility for retail traders with relatively smaller capital to speculate on the price movement of coffee.
With coffee CFDs, traders can open buy or sell positions to make a profit or loss from coffee price fluctuations without owning the coffee assets or its futures contract.

Trading Coffee-Related Shares

It is also considerable to gain exposure to fluctuations in coffee prices by trading and investing in the shares of multinational corporations involved in the production, consumption, and sale of coffee products. For instance, you could trade the share CFDs of the big four coffee buyers, leading Indian coffee producers like Tata Coffee Ltd or even well-known coffee retailers like Starbucks.

Trading Coffee Exchange Traded Funds (ETFs)

Coffee ETFs, akin to shares of coffee-related companies, are financial instruments traded on stock exchanges. They provide an alternative means for market participants to gain exposure to coffee prices.

Popular ETFs providing exposure to coffee prices are:
1: iPath Dow Jones - UBS Coffee ETN: This is the largest and most actively traded coffee ETN. It is designed to match the performance of the Dow Jones coffee index.

2: iPath Pure Beta Coffee ETN: This ETN is designed to track the performance of coffee by utilising the Pure Beta Coffee Index as its benchmark.

Understanding Coffee Trading Hours

The trading hours for coffee vary across regions, coffee varieties, and financial instruments.

Trading Hours for Coffee Futures

The Intercontinental Exchange (ICE) offers varying trading sessions for coffee futures and options contracts. However, it's important to note that these session times can change throughout the year due to Daylight Saving Time in both the UK and US while Singapore operates on Singapore Standard Time (UTC+8) without any changes throughout the year.

Trading Hours for Coffee CFDs

For those involved in trading coffee CFDs, access to the coffee market extends beyond the trading hours of traditional exchanges. With the Plus500 app or WebTrader platform, traders can monitor the price movement of coffee CFDs and execute trades starting Monday to Friday at 08:15 UTC to 17:30 UTC.
Note that trading hours and choice of instruments are subject to individual operators.

How to Monitor and Track the Price Movement of Coffee

You can monitor the live price of coffee via our CFD trading platform. Plus500 offers the CFD derivative of ICE Arabica Coffee futures, with a ticker symbol represented as Coffee (KC). The platform not only displays the price movement of Coffee (KC) but also provides valuable tools like technical indicators and relevant economic calendars for informed trading decisions.

How to Track the Live Price of Coffee CFDs in 3 Steps:

1. Log into the Plus500 app or web trader platform
2. Type “Coffee” in the search bar to find the "Coffee CFDs" among commoditie.
3. Select "Coffee" from the drop-down list and the live chart will appear

Conclusion

Coffee, a highly liquid yet volatile commodity, demands that traders be aware of the various factors influencing its price movements, such as weather and production.
To mitigate the risks associated with coffee trading, it is important to test and practise your strategies on demo trading accounts before trading the various coffee financial instruments with real money. Trading commodities like coffee alongside stocks and forex is a diversified approach that may offer a balanced portfolio strategy.

To further explore how to trade Coffee, see our article: “Coffee Trading Guide and Strategies: How to Trade Coffee”.

Frequently Asked Questions

Is Coffee the second most traded commodity?

As of 2023, Gold ranked as the second most traded commodity, not coffee. However, in terms of cumulative volume, coffee ranks second only to Crude oil.

Where are the Arabica coffee beans typically grown?

Arabica thrives in tropical climates close to the equator, which is why it experiences optimal growth in countries like Ethiopia, India, Colombia, and Brazil (the world's largest Arabica producer).

What Is the Most Traded Coffee Futures Contract?

The most actively traded coffee futures contract is the global Arabica coffee, which is traded on the Intercontinental Exchange (ICE) under the designation ICE C Coffee Futures Contract.