7 Things You Must Know About Coffee Futures

In the developing countries, java stocks, once quantified by monetary volume is projected into the 2nd popular commodity that’s traded, just alongside crude petroleum as being a source of foreign market, in accordance with statistics from the International Coffee Organization (ICO). It’s projected that the before all else cafe opened its doors in 1457 at Constantinople, contemporary Turkey. The java shop brought an vague seed and then converted it to some tiny known drink called coffee into the entire world.

Coffee is claimed to have started from Ethiopia over 1000s annually but gained fame from the Ottoman Empire. By Turkey, java is thought to have went westwards, to France and Italy. In its first times, the java was regarded as a beverage of those sins as well as the sultans, a far cry out of a commodity that’s currently within reach of the frequent person.

In the currency world, java was significantly regulated among countries upward to 1989 with way of a string of global trade arrangements chiefly to handle demand and supply also to keep amount stability. All these were finally abandoned and after all 1990 coffee amounts are susceptible to the free marketplaces. Observing this large change, java amounts lost over 75 percent of its value within the subsequent five decades, decreasing to $0.77 percent by 1995off the highs of $1.34 percent in 1989, before java changed to being traded at the free marketplaces.

Coffee stocks come under the class of soft products and also the futures amounts tend toward undergo volatile swings. As a result of varying size of their java futures trades, futures traders will need to be specially attentive when trading java stocks. Below are just seven important things to be aware of before you trade java futures.

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Coffee Futures Chart (KC)

#1. Types of Coffee Futures

When trading coffee futures, it is important to know that there are primarily two versions of coffee that are floating around. They are Robusta and Arabica. Coffee futures are traded on various exchanges such as the Singapore Commodity Exchange which primarily deals with the Robusta coffee while Brazil’s Commodities and Futures Exchange (BM&F) deals with Arabica and the Tokyo Grain Exchange offers both Arabica and Robusta.

In the U.S. coffee futures are traded on the Intercontinental Exchange (ICE) or formerly called the New York Board of Trade (NYBOT)

Similar to crude oil which has various versions such as heavy or light sweet, coffee is categorized based on some characteristics of the beans. Arabica beans are said to have a sweeter and softer taste while Robusta is said to be stronger in taste with a grainy overtone.

Arabica coffee is largely produced in sub-tropical climate and requires rich soil, shade and sun. It is estimated that over 70% of the coffee grown in the world is Arabica They are more vulnerable to pests and cold weather. Arabica coffee is grown at higher elevation of 600 to 2000 meters. Arabica coffee is usually sold in specialized coffee stores and in specialty food stores.

For example, in Italy, the highest quality pure Arabica beans are used to make espresso.

Robusta coffee is easier to farm, growing at altitudes of 200 – 800 meters. In terms of yield, Robusta coffee produces more yield compared to Arabica and also has lower costs for production. Robusta coffee is usually found everywhere as it is a lot cheaper compared to Arabica version.

#2. Coffee futures contract specifications

The ICE coffee futures which is by far the most popular futures marketplace has the following contract specifications.

Ticker KC
Contract Size 37,500 pounds
Grade Arabica Coffee
Contract Months Mar (H), May (K), Jul (N), Sep (U), Dec (Z)
Trading hours 1.30 a.m.- 3.15 p.m. EST
Tick Size .05 cent/pound
Tick Value $18.75

A one-cent change in coffee futures amount is equivalent to $375.

At the Euronext exchange, Robusta coffee futures are traded, also known as No. 409. In Robusta, amounts are quoted in dollars per metric ton and traded in a standardized quantity of 10 tonnes. Other versions of coffee which are traded on the Tokyo Grains exchange are priced in yen, while the Liffe listed coffee contracts are priced in British pounds.

#3. Coffee production trends

Coffee production and cycles are very different from traditional crops. For example, it is common to see a large coffee crop in one year followed by a smaller coffee crop the next year. However, coffee production has been steadily boosted over the years, with sporadic declines in production every now and then. The highest coffee production was recorded in the year 2012/2013 where coffee production reached record highs of 145.1 million bags.

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Coffee production styles (1963 64 – 2012 13 ). (Source ICO.org)

Coffee is mainly created in Africa, Asia and Central America.

Although java production began in Africa, the continent has recently proven a steady reduction in coffee production on the previous 50 decades, based on recent statistics released by the ICO. It’s projected that Africa’s talk of java production dropped from 25% throughout the years to approximately 14% since. At the time of 2012/2013, java production in Africa has been believed be approximately 16.7 million.

With the exception of Ethiopia, java production from several other African nations like Kenya, Cameroon is steadily decreasing.

In Asia, java production was steadily rising using Vietnam steadily gaining marketplace share. That is followed closely by India and Indonesia.

In Central America Costa Rica, Brazil and Mexico are one of the best manufacturers of java.

Number 4. Seasonality at Coffee production

More than 90 percent of their coffee trade is traded at the green or unroasted coffee beans. Seasonal things play a huge part in java manufacturing, and affecting the amount of coffee futures. While there isn’t any intense summit production for java in any certain time of this season, java consumption is supposed to decline by 12 percent on average throughout the summertime. On the flip side, java imports of these beans have been noticed to diminish throughout the summer and spring season while demand accumulates in autumn and during winter months.

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Coffee Seasonal Trends (Source – Marketqview.com)

The above chart shows a 15 and 5 year composite overview of coffee’s seasonal trends. Based on the supply/demand mentioned previously, coffee amounts typically rise during the August – October months with a low being formed during October before amount starts to move steadily higher. Coffee amounts are generally bullish, forming a peak during the June-July months largely due to the weather impact the crop in Brazil and the winter months in the Southern Hemisphere. Coffee from Brazil is harvested starting in May and runs into several weeks.

Low amounts for coffee generally tend to conceive problems for producers. When coffee amounts fall beneath the cost of production there is little to no economic incentive to produce coffee. During these periods, coffee production grinds to a halt due to expensive overheads. The result from this is that the coffee trees yield less due to lower labor and use of fertilizers and also impacts the quality of the coffee that is produced.

This impacts the Arabica coffee beans which grows at higher altitudes and thus is more expensive to maintain and grow.

#5. Weather and Brazil

The biggest producer of Arabica coffee beans comes from a tiny state of Minas Gerais in Brazil which produces medially 25 – 30 million bags of coffee each year. The output from Minas Gerais is larger than other countries such as Colombia or Indonesia. Weather can often play havoc with coffee production in this region and tends to influence the farmer’s decisions on growing coffee. It is said that farmers in this region tend to hold on to the dry processed coffee in warehouses and sell them only when the marketplace is right.

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In general, Brazil experiences harsh winters once every 5-years on average which can greatly disrupt the production process. For day traders in the coffee marketplaces, it is essential to following the weather reports and forecasts to be prepared for any news that could gain volatility in the coffee futures amounts.

#6. Economic reports affecting Coffee futures fundamentals

There are many economic reports released by various independent institutions tracking the supply/demand and giving forecasts. The United States Department of Agriculture issues timely reports, specific for Coffee to the U.S. which is an important economic report that could influence the short term amounts of coffee futures.

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USDA Coffee Market Report (Published twice per year)

The USDA’s Coffee: World marketplaces and Trade report covers the Arabica and Robusta coffee trade and supplies a quote over the creation and distribution side. It insures java exports and production out of key countries like Brazil, Vietnam, Central America and Mexico and India.

The Coffee marketplace report also provides the company ‘s insights in to the long run supply and requirement also gives extensive quotes on production, bean exports and stocks. The report is currently published twice per year in June and December and certainly will strong influence java amounts for the brief term.

For all those curious, the USDA’s java reports could be retrieved out of here.

Number 7. Sentiment indexes (Commitment of Traders Report)

While the USDA’s bi annual report offers glimpses to the moderate to long term trends in coffee output, it gives short-term volatility that day traders are able to take convenience of. Nevertheless, in the rest of the calendar year, short-term speculators may check out the CFTC’s Commitment of Traders report that is published weekly on a Friday. The CoT report indicates the institutional and manufacturer side placement from the Coffee futures marketplace. Even though report concludes by three days, the data will offer substantial insights in to the java marketplace.

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CFTC CoT Report on Coffee Futures

Traders can either follow the week to week positioning of the speculative money or wait for the marketplace to be crowded to one side before taking a contrarian position.

Trading coffee futures is an interest addition for futures traders. Being one of the most highly used commodities and coming only second to crude oil in terms of dollars traded futures day traders can take convenience of the liquidity that comes with the coffee futures marketplaces. However, due to the volatility in the coffee marketplaces, day traders should be careful and before trading should conduct a broad research into the marketplaces to understand if there are any key short term trends that are in play. Paying attention to the seasonality in the coffee marketplace can also help traders to stay on the right side of the marketplace.

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