Your guide to trading coffee

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Why is coffee important to traders?

With more than 2.25 billion cups of coffee consumed daily, coffee beans comprise one of the most traded soft commodities in the world. Today, the coffee market is worth over $100 billion annually. With continuously growing demand, it has become one of the most interesting, yet volatile investment tools to trade. While some use coffee futures and options to hedge their portfolio, others speculate.

Coffee is derived from a plant that is grown in more than 50 countries, all with tropical and subtropical climates. Brazil is the leading producer, providing about 35% of the global coffee grown. The other top producers include Vietnam and Colombia.

trading coffee

The largest importers of coffee are the United States, the European Union, Japan, Canada and South Korea. The global consumption of the bean continues to grow at a steady annual rate of 2 per cent, with artisanal coffee shops rapidly cementing their place in modern society’s retail business.

As such an important dietary staple, this agricultural commodity has spawned a large economy of its own. In the US alone, the economic impact of coffee exceeds $225 billion and comprises approximately 1.6% of the country’s total GDP. The coffee industry accounts for an estimated 1.7 million US jobs.

Therefore, coffee commodity prices play an important role in the global economy.

All in all, is coffee a good investment? Just like any other asset, trading coffee gives no guarantee of financial success. Nevertheless, for years, this agricultural commodity attracted the attention of international investors and traders seeking to add some substantial growth and diversification to their portfolios.

What are the types of coffee?

When choosing to trade this commodity, it is important to decide on the coffee bean type. There are two main varieties to consider: Arabica and Robusta.

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

Robusta beans, on the other hand, are slightly smaller in size, and pack a stronger and more bitter flavour stemming from its 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 it when you buy Starbucks or other high coffee. Nonetheless, it is Robusta that usually trades at higher prices. This is due to demand from large, global corporations. These include, among others, the Swiss multinational Nestlé (NESN), which uses Robusta beans for its famous Nescafe product line. However, due to the high volume of purchases, any changes in the demand from those large businesses can affect the prices of Robusta coffee dramatically.

Both Arabica and Robusta coffee are traded in 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.

trading coffee

Note that investing in futures requires a high level of sophistication as factors like interest rates and storage costs affect pricing.

Coffee market trading hours

The Intercontinental Exchange (ICE) provides the following trading sessions for coffee futures and options:

trading coffeeIf you choose to trade CFDs, you can follow the prices of both Robusta and Arabica coffee live with our comprehensive price charts. With Capital.com, you can trade:

Why trade coffee?

There are several major reasons to trade coffee, however, the most common are the following:

  • Diversification

The presence of coffee in an equity-only portfolio can lower the volatility due to the absence of a correlation between this commodity and other asset classes.

  • Safe Haven

Commodities can serve as a safe haven in times of global economic uncertainty and market turbulence, providing traders with protection against inflation and a declining US dollar.

  • Speculation on coffee prices

Commodities may be highly volatile, experiencing wild price swings. Trading coffee CFDs is one way to try and profit from drastic silver price fluctuations.

Coffee trading requires some consideration, due to the market’s occasional high volatility and a wide choice of available instruments, from coffee derivatives, such as futures and options, to shares of those companies engaged in the industry.

Top coffee market businesses

One of the ways to invest in the coffee industry is to buy shares of a company that produces or sells the commodity. The stocks of such businesses are heavily influenced by the coffee market and can offer good value compared to trading the commodity itself. Of the myriad companies one can choose to invest in, a few names dominate the industry. These include:

trading coffeeSavvy traders often suggest investing in more than one company, in order to hedge your bets and avoid having all your eggs in one basket. Another way to protect yourself from the possible risks is to purchase stock in a business whose product portfolio includes more than just coffee, so its performance does not overly rely on the commodity.

How to invest in coffee CFDs?

One of the easiest and most popular ways trading coffee is with CFDs.

A contract for difference (CFD) is a type of contract between a trader and a broker in order to try and profit from the price difference between opening and closing the trade.

You are more liquid when you purchase CFDs as you are not tied to the asset: you have merely purchased the underlying contract. Therefore, investing in coffee CFDs saves you the inconvenience of buying and owning the commodity physically.

In addition, CFDs give you the opportunity to trade coffee in both directions. Regardless of having a positive or negative view of the coffee market forecasts and predictions, you can try to profit from both upward and downward future price movement.

You can either hold a long position, speculating that the coffee market price will rise, or a short position, speculating that the price will fall. This is considered a short-term investment as CFDs are used within shorter timeframes.

Trade US Coffee Arabica Spot CFD

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Looking for a reliable CFD trading provider to invest in coffee? If so, just spend 3 minutes of your time to sign up and start your journey of coffee trading with Capital.com. Try our award-winning trading platform or download our mobile app, which will become your smart CFD trading assistant.

Why trade coffee CFDs with Capital.com?

Advanced AI technology at its core: a Facebook-like news feed provides users with personalised and unique content depending on their preferences. If a trader makes decisions based on biases, the innovative news feed offers a range of materials to put her back on the right track. The neural network analyses in-app behaviour and recommends videos, articles, news to help polish your investment strategy. This will help you to refine your approach when trading coffee as a commodity.

Trading on margin: thanks to margin trading, Capital.com provides you with the opportunity to trade coffee CFDs and other top-traded commodities even with a limited amount of funds in your account.

Trading the difference: when trading a coffee CFD, you do not buy the underlying asset itself, meaning you are not tied to it. You only speculate on the rise or fall of the coffee trading price. CFD trading is nothing different from traditional trading in terms of strategies. A CFD investor can go short or long, set stop and limit losses and apply trading scenarios that align with his or her objectives.

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

Focus on safety: Captal.com puts a special emphasis on safety. Licensed by the FCA and CySEC, it complies with all regulations and ensures that its clients’ data security comes first. The company allows to withdraw money 24/7 and keeps traders’ funds across segregated bank accounts.

Coffee price history

trading coffee

In the centuries in which coffee has been traded, the commodity has witnessed many ups and downs. Indeed, in recent decades alone its price has fluctuated from as high as $3.35 to as low as $0.43 per  pound.

The modern history of the coffee market 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 the ICA negotiations in 1989.

The 1989 Agreement collapse was disastrous for many along the supply chain, with the International Coffee Organization’s (ICO) composite indicator price for coffee falling by almost 75 per cent in the next five years, from $1.34 a pound in 1989 to an average of $0.77 a pound 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 a pound 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 between the prices of the two coffee types has dramatically widened. Since 1990, the annual average differential has increased up to $0.523 a pound, with the gap reaching its record high levels of more than $1.60 a pound in 2011.

FAQ

There are several factors that may have a significant impact on the prices of coffee. These, among others, include geopolitical stability, fluctuations in foreign currency exchange rates, changing trade regulations and restrictions, transportation costs and speculator effect.

However, like with many other commodities, the major coffee price drivers are the laws of supply and demand.

Supply factors include:

  • Coffee flowering and fruiting cycles
  • Climatic conditions and weather changes, such as the impact of El Nino
  • The number of countries producing coffee
  • Productivity and investment in coffee production in major coffee farming nations

Demand factors include:

  • Growing demand in emerging nations
  • Growing global coffee shop industry
  • Substitution to cheaper beans
  • Prices of substitute products, such as tea and cocoa

The term “soft commodities” generally refers to agricultural goods that are grown rather than extracted or mined. Also known as “softs”, these are some of the oldest assets available to trade today, with their roots in commerce tracing back thousands of years. Some of the examples of soft commodities include cocoa, coffee, cotton, corn, orange juice, sugar and wheat.

Softs trading has been gaining more interest among traders who are looking to diversify their portfolio of stocks and bonds. Owning even the smallest percentage of soft commodities can help to hedge against political and economic turbulence and reduce portfolio's exposure to both volatility and risk.

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