Coffee trading explained: How to trade coffee

Coffee trading is a form of commodity trading that involves buying and selling contracts for coffee beans to speculate on the market’s high price volatility. Coffee traders may also trade other soft agricultural commodities such as sugar and cocoa. 

What is coffee trading?

Coffee is one of the most traded commodities worldwide. It is derived from a plant grown in more than 50 countries, all with tropical and subtropical climates. 

Brazil is the world’s leading coffee producer, accounting for around 39% of global supply. The other top producers include Vietnam, Colombia, Indonesia and Ethiopia.

Source: International Coffee Organisation (ICO)

The largest importers of coffee are the EU, the US, Japan, Russia and Canada. The global consumption of the bean had grown around 2% annually before the pandemic, when covid-related disruption affected its trade. It has since started to resume a steady growth rate. 

Coffee trading history

The coffee commodity trading market has a long history. Coffee was traded and consumed in the Middle East as far back as the 15th century. By the 17th century, coffee houses were popular among merchants in Europe as places to meet and discuss trade. 

London’s Lloyd’s Coffee House opened in 1686, providing shipping news for sailors, merchants and shipowners, and led to the establishment of the Lloyd’s of London insurance market, the Lloyd’s Register professional maritime services company and several other shipping and insurance businesses.

The growth in demand for coffee in Europe led to coffee plantations being established in colonies around the world. Today, close to 170 million bags of coffee are consumed globally every year, according to the International Coffee Organisation (ICO).

Source: International Coffee Organisation (ICO)

Over the centuries, coffee as a traded commodity has witnessed many ups and downs. In recent decades its price has fluctuated from as high as $3.35 to as low as $0.43 a pound.

The modern history of the coffee trade and its pricing can be divided into two periods: the regulated period under the International Coffee Agreements (ICA) from 1963 to 1989; and the subsequent free market period, which followed the breakdown of ICA negotiations in 1989.

The 1989 Agreement collapse was disastrous for many on the commodity’s supply chain. The ICO’s composite indicator price for coffee fell by almost 75% in five years, from $1.34 a pound in 1989 to an average of $0.77 in 1995.

During the regulated period, the average price differential between Arabica and Robusta was around $0.149 a pound. An annual high of $0.475 was recorded in 1986, following an Arabica supply shortage after a 1985 Brazilian drought.

At the beginning of the free market period, however, the difference in price between the two coffee types widened. Since 1990, the annual average differential has increased to $0.523 a pound, with the gap reaching its record high level of more than $1.60 a pound in 2011.

As such an important dietary staple, this agricultural commodity has spawned a large economy of its own.

In the US alone, the coffee market was valued at $25b in 2021 and projected to grow at a compound annual rate of 3.8% over the next five years. The commodity market therefore plays an important role in the global economy.

Types of coffee

There are two main varieties of coffee beans traded on the commodity markets: Arabica and Robusta.

Arabica coffee beans are more oval and flat in shape, and offer a sweeter, lighter and smoother taste. They account for around 70% of all the coffee on the market.

Robusta beans are slightly smaller and have a stronger and more bitter flavour stemming from their much higher caffeine content. They account for 30% of total coffee production.

Arabica beans may often be considered higher quality, and you are likely drinking them when you buy a cup of Starbucks (SBUX) coffee. But it is Robusta that usually trades at a higher price.

This is due to demand from large, global corporations, including the Swiss multinational company Nestlé (NESN), which uses Robusta beans for its Nescafe product line. The high volume of purchases means that any changes in demand from those large businesses can affect the prices of Robusta coffee dramatically.

Trend traders tend to prefer Arabica as pricing is more stable, while the Robusta market offers more price volatility for short-term traders.

Both Arabica and Robusta are traded using options and futures contracts on the Intercontinental Exchange (ICE). Arabica coffee is also traded in futures contracts under the ticker symbol KT on the New York Mercantile Exchange (NYMEX), which is operated by the Chicago Mercantile Exchange (CME) Group.

Coffee market trading hours

ICE sets out the following hours when trade in coffee is allowed for futures and options:

*Hours are set by ICE and may vary. Hours will shift between March and November as the UK and US change to and from daylight savings on different days, while Singapore remains on Singapore Standard Time (UTC+8) all year round.

If you choose to trade contracts for difference (CFDs), you can follow the prices of Robusta coffee futures and the Arabica spot coffee price live with our comprehensive charts. With Capital.com, you can trade CFDs in these coffee trading hours:

Arabica coffee: Monday to Friday, from 12.15 to 20.30 (UTC)

Robusta coffee: Monday to Friday, from 03:05 to 00:00 (UTC)

What moves coffee prices?

There are several major factors that could affect coffee prices. If you are going to trade coffee it is important to understand the dynamics that drive prices. 

The ‘Big Four’

The largest buyers of coffee beans on the international markets are known as the so-called ‘Big Four’: Nestle (NESN), Kraft (KHC), Procter & Gamble (PG) and Sara Lee (SLE). Together, they purchase around 50% of all the coffee produced globally. They primarily buy Robusta beans, so their activity exerts a strong influence on prices.

Climate

As an agricultural commodity, coffee production is largely determined by the impact of weather conditions on sensitive crops. If the climate is conducive to growing coffee plants, prices can drop, but an unfavourable climate can cause prices to rise. 

This is because good weather during the growing season can increase the supply, while adverse weather conditions can damage crops or hamper their growth. As the five largest producers account for around 65% of global supply, weather conditions can have a significant effect on supply and, in turn, pricing.

Arabica coffee prices soared to 10-year highs in late 2021, as drought and frost reduced output in Brazil and heavy rains affected production in Colombia. ICE-certified stocks fell to their lowest level in 22 years.

Plant disease

Agricultural commodities are also affected by other risks that can influence the condition of plants, such as disease.

‘Coffee leaf rust’ is a disease caused by a fungus that can devastate coffee crops. Robusta beans are more resilient than Arabica beans, which are more delicate and susceptible to damage from bad weather or disease.

For example, global coffee prices rose sharply in 2013 after coffee leaf rust damaged crops in Central America and reduced supply. It was estimated that around 70% of Guatemala’s coffee production was affected.

Consumer habits

Coffee drinking trends are a key driver of demand and price direction. The emergence of specialty coffee shops is increasing demand for premium, artisan beans. 

Consumption is also changing in different parts of the world, with emerging markets such as in Asia leading demand growth because of rising incomes, changing tastes and growing populations. But the ongoing debate around the health effects of drinking coffee can also affect consumption. 

Although Arabica and Robusta beans have different flavours, major changes in the price for one can affect the demand for the other. If Arabica prices soar, demand for Robusta as a substitute could increase in response.

Geopolitics

As more than 90% of coffee is produced in developing countries, social unrest or political instability can disrupt coffee production and market sentiment. Futures prices respond quickly to geopolitical events in major producing nations.

With Russia being the world’s sixth largest coffee consumer, the war in Ukraine and resulting sanctions has had an impact on coffee demand, and is expected to cause a supply surplus in the 2022 to 2023 growing season. 

Distribution costs

The cost of transporting coffee around the world is factored into prices. Costs for fuel and shipping determine how expensive it is to distribute coffee. During the Covid-19 pandemic, high freight costs contributed to prices reaching decade highs.

US dollar

Commodity markets including coffee are often priced in US dollars, so the value of the dollar also affects prices. Dollar-denominated commodities become more expensive for buyers with other currencies when the dollar rises, which can weigh on demand. Meanwhile, coffee becomes cheaper when the dollar falls, increasing international demand.

How to trade coffee

How is coffee traded? If you are interested in trading coffee, you should be aware of the different instruments you can use to trade the market.

Stocks and ETFs

Most coffee producing companies are privately owned so their stocks are not available for investing. But there are a few public companies that you can buy and sell shares of. You can also trade exchange-traded funds (ETFs) that invest in coffee futures contracts as a way to gain exposure to the market from your share dealing account.   

Futures and options

Alternatively, you can trade coffee futures and options contracts to speculate on changes in the market’s direction without holding stocks or funds. 

Options on coffee futures contracts trade on the Intercontinental Exchange (ICE). Futures are a type of derivative instrument that enables traders to take positions on commodity prices. When contracts expire, they are settled financially on the New York Mercantile Exchange (NYMEX) but settled physically on the ICE.

Futures and options contracts allow you to speculate on the price for a specified quantity of coffee on a set date in the future. If you’re interested in how to trade coffee futures, you’ll need to have a brokerage account that gives you access to ICE contracts.

CFDs

Contracts for difference (CFDs) are a form of contract between a trader and a seller that allows the trader to speculate on the difference in an asset price without owning the underlying asset.

You can use CFDs for coffee to take a position on the direction of Arabica or Robusta prices without holding any stocks or funds.

CFDs are leveraged products that allow you to trade on margin which magnifies potential returns on your position with a smaller initial deposit. Note that CFD trading is high risk, as leverage could also increase your losses.

You can trade coffee CFDs with Capital.com. 

Coffee trading strategy

Before you start trading coffee, you could plan a clear coffee trading strategy to follow. Commodities like coffee are highly volatile, which increases the risks, and, as with any other asset, it’s important to use a defined plan to help you make decisions.

A good strategy helps you set  criteria for when to enter and exit a position without letting emotions get in the way, preventing you from selling in a panic or buying at the top of the market.

There are several different approaches you may take in coffee trading, depending on your preferences  – whether you are in for the short or the long term, and how you intend to use technical analysis tools.

Scalping

Scalping is a strategy that involves opening and closing positions within minutes to speculate on price volatility. 

Traders use technical analysis tools when scalping to identify entry and exit points. Once they have identified a bullish or bearish trend using technical indicators, scalp traders place a buy or sell order with a stop loss at the support level.

The scalp trade is closed as soon as the technical indicators point to the price changing direction.

Day trading

The concept of day trading coffee is similar to scalping, but it typically involves the trader holding a position open for hours instead of minutes. As with scalping, day traders use technical analysis tools to identify the entry and exit points for their trades. 

Range-bound trading

Markets become range bound when they enter a period of price stability within relatively close support and resistance levels. 

Traders can still open positions when markets are not highly volatile – they use the support and resistance levels to identify entry and exit points, buying when the price reaches support and selling when it approaches resistance.

Trend trading

Trend trading, also known as position trading, takes a longer-term approach. 

Markets are in an upward trend when they reach higher highs, and lows and are in a downward trend when they reach lower lows and highs. Traders use technical analysis indicators such as moving averages to identify when to enter and exit positions.

How to trade coffee CFDs

How is coffee traded using CFDs? CFDs are flexible instruments that allow traders to speculate on various coffee price fluctuations, whether it’s an upward or a downward movement. CFDs are considered more suitable for taking a short-term position on the coffee price, due to overnight fees. 

If you want to start coffee trading online, you can sign up for an account with a CFD provider. Rather than requiring a specific account, you can trade coffee CFDs along with other CFDs like commodities, stocks and ETFs in the same trading account.

To start trading CFDs on coffee, follow these steps:

1. Create a CFD trading account

2. Choose whether you want to trade Arabica or Robusta coffee

3. Use your strategy to identify trading options

4. Open your first trade and consider using risk management tools, such as a stop loss

5. Monitor your trade using technical and fundamental analysis tools 

6. Close your position based on your trading strategy

Pros and cons of trading coffee CFDs

Commodities can be highly volatile, experiencing enormous price swings. Coffee prices can be especially volatile given the impact of sudden climate or geopolitical events on supply and demand. Trading CFDs for coffee is one way that traders can use to speculate on sharp price fluctuations. 

CFDs give you the option to trade the coffee markets in both directions. Whether you have a positive or negative view of coffee prices, you can take a long or short position to try to profit from the price movement. Note that the asset’s price can go against your position, which could trigger losses. 

The 10% margin offered by Capital.com means you have to deposit only 10% of the value of the trade you want to open, and the rest is covered by your CFD provider. For example, if you wanted to place a trade for $1,000 worth of coffee CFDs with a 10% margin, you would need only $100 as initial capital to open the trade.

However, you should be aware that trading coffee CFDs carries risks, as they are leveraged products that amplify the size of the loss if prices move against your position, as well as maximising gains if the price moves in the same direction.

It is important to understand how leverage works and have a risk management plan in place before you start trading CFDs.

Why trade coffee CFDs with Capital.com?

Advanced AI technology at its core: A personalised news feed provides users with unique content depending on their preferences. The neural network analyses in-app behaviour and suggests videos and articles that fit your investment strategy. 

Trading on margin: Thanks to margin trading, Capital.com provides you with the opportunity to trade coffee CFDs and other top-traded commodities CFDs, even with a limited amount of funds in your account. Keep in mind that CFDs are leveraged products, which means both profits and losses can be magnified. 

Trading the difference: By trading coffee CFDs, you don’t buy the underlying asset itself. You only speculate on the rise or fall of the coffee price. A CFD trader can go short or long, and apply trading scenarios that align with their objectives. CFD trading is similar to traditional trading in terms of its associated strategies. However, CFD trading is short term in nature, due to overnight charges.

All-round trading analysis: The browser-based platform allows traders to shape their own market analysis and make forecasts with sleek technical indicators. Capital.com provides live market updates and various chart formats, available on desktop, iOS and Android.

Sign up at Capital.com and use our web platform or download the investment app to trade CFDs on the go. It will take you just three minutes to get started and access the world’s most traded markets.

FAQs