January 19

Coffee Futures – Trading Strategies | Symbols and Contract Specifications

Last Updated on 19 January, 2023 by Samuelsson

Coffee futures are trading through Intercontinental Exchange (ICE)Coffee futures contracts are among the most actively traded soft commodities on the commodity exchanges. Gotten from the cherries from certain Coffea species, coffee beans are believed to have originated in Kaffe, Ethiopia, as early as the 9th century. Today, the coffee plant is grown in more than 70 countries around the world.

Coffee futures market trade on the ICE and is perfect for traders and hedgers who want to get quick and easy access to the coffee market. 

Two types of coffee plants are commonly grown: Arabica and Robusta. The coffee futures contract traded on the Intercontinental Exchange (ICE) is the Arabica species. As a result of the stimulating effect it has on humans, coffee is widely consumed around the globe. The commodity has spawned a huge economy of its own, creating over 1.7 million jobs in the US and accounts for over 1.6 percent of the GDP.

Coffee Futures trading

Uses of Coffee

Ripe coffee cherries are harvested, processed, and dried to get the coffee beans, which are then roasted and ground to get the powder coffee beverage, or brewed with a coffeemaker. The beverage is slightly acidic, bitter, and dark-colored, and it can be prepared in a variety of ways. Due to its caffeine content (an effective brain stimulant), it is an important dietary staple among the working class.

Caffeine has been shown to relieve mental and physical fatigue and improve alertness. In addition, people who regularly drink coffee may enjoy other benefits. Clinical studies show that moderate coffee consumption offers the following benefits over the long term:

Coffee Futures – Trading Strategies | Symbols and Contract Specifications

It prevents or delays the onset of dementia, Alzheimer’s disease, senile cognitive decline, and Parkinson’s disease.
It reduces the risk of type 2 diabetes.
It can relieve dizziness caused by low blood pressure.
It may reduce the risk of developing colorectal cancers.
It may prevent the formation of gall bladder stones.

Even without these new findings, coffee futures contracts have been among traded agricultural commodities.

The Largest Producers and Consumers of Coffee

The coffee plant is cultivated in more than 70 countries, especially in the central and southern regions of America, Africa, and Southeast Asia. Brazil is, by far, the largest producer and exporter of coffee, followed by Vietnam, Colombia, Indonesia, Ethiopia, Honduras, India, Uganda, Mexico, and Guatemala.

More than 2 billion cups of coffee are consumed all over the world on a daily basis. The United States and the European Union are the top consumers and importers of coffee. Other top coffee consumers include Japan, Russia, Switzerland, India, Canada, and Brazil. Coffee futures contracts help to facilitate the transaction between producers and consumers.

Why Trade Coffee Futures Contracts

While other agricultural commodities can offer good trading opportunities, there are many reasons some traders prefer to trade coffee futures contracts:

Increasing demand: As world economies grow, especially the emerging economies in Asia, South America, and Africa, there will be more people using coffee to maintain alertness during working hours. Additionally, studies are showing some health benefits of drinking coffee, which can make people consume more coffee. Moreover, the proliferation of coffee shops like Starbucks can only lead to an increase in coffee consumption. So, the demand for the commodity will likely keep increasing, adding more liquidity in coffee futures contracts.

Potential supply scarcity: Only five countries account for more than 65 percent of the world’s coffee beans supply. Adverse weather conditions or political instability in any of those countries could affect coffee production, leading to a price increase.

Diversify portfolio: As with other agricultural commodities, investors and fund managers use coffee to spread their risk exposure across many asset classes. In diversifying their investment portfolio, they to reduce their market risk.

Inflation hedge: Coffee is one of the commodities that can be used to hedge against inflation since its value tends to increase when there is inflation. It is better to have the commodity than to keep dollar notes, which depreciates with rising inflation.

Coffee Futures Trading Strategies

Coffee is a great market for traders who want to extend to new markets to achieve better risk-adjusted returns!

Finding a trading strategy in the coffee market is harder than in some other futures markets, but far from impossible. We trade coffee strategies, and even have managed to find daytrading strategies in coffee, like the one showcased in the image above.

Coffee Futures – Trading Strategies | Symbols and Contract Specifications

If you wish to get edges to start building your own trading strategies, we would like to recommend our edge membership!

Trend Following: This strategy involves identifying the overall trend in the coffee market and positioning trades in the direction of that trend. This can be done by analyzing price charts and identifying key levels of support and resistance.

Contrarian Trading: This strategy involves taking positions that are opposite to the current market sentiment. For example, if the market is bearish on coffee, a contrarian trader may take a long position in coffee futures.

Spread Trading: This strategy involves buying and selling two different coffee contracts at the same time. This can be done by buying a nearby contract and selling a further-out contract, or by buying one type of coffee and selling another. This strategy can be used to take advantage of price differentials between different contracts.

Technical Analysis: This strategy involves using technical indicators, such as moving averages and stochastic oscillators, to identify potential trading opportunities in the coffee market. Technical traders may also use chart patterns, such as head and shoulders or double bottoms, to identify potential entry and exit points.

Seasonal Trading: This strategy involves taking positions based on historical patterns in the coffee market. For example, coffee prices may typically rise during the summer months due to increased demand for iced coffee. A seasonal trader may position trades to take advantage of this trend.

How to Play the Coffee Market

Trading coffee futures contracts is the best way to play the coffee commodity market. Coffee C futures contract, which is the benchmark for Arabica species of coffee, trade on the ICE and the New York Mercantile Exchange (NYMEX), a member of the Chicago Mercantile Exchange (CME). The contract can be traded from any part of the world on the CME Globex electronic platform.

One Coffee KC contract is equivalent to 37,500 pounds of Arabica coffee beans, and it normally expires in the months of March, May, July, September, and December. On the NYMEX, the contracts are settled with cash at expiration, while on the ICE, they are settled by physical delivery.

The futures market gives you the opportunity to trade with leverage. With a small initial deposit, you can carry a big contract. There are other ways to trade coffee, such as coffee options, coffee ETFs, and coffee CFDs, and they differ from futures trading in the following ways.

Comparing coffee futures contracts with other methods of trading coffee

Coffee futures contracts are among the most actively traded soft commodities on the commodity exchanges. Gotten from the cherries from certain Coffea species, coffee beans are believed to have originated in Kaffe, Ethiopia, as early as the 9th century. Today, the coffee plant is grown in more than 70 countries around the world.

Coffee futures market trade on the ICE and is perfect for traders and hedgers who want to get quick and easy access to the coffee market. 

Two types of coffee plants are commonly grown: Arabica and Robusta. The coffee futures contract traded on the Intercontinental Exchange (ICE) is the Arabica species. As a result of the stimulating effect it has on humans, coffee is widely consumed around the globe. The commodity has spawned a huge economy of its own, creating over 1.7 million jobs in the US and accounts for over 1.6 percent of the GDP.

Coffee Futures – Trading Strategies | Symbols and Contract Specifications

Factors Affecting Coffee Prices

There are several factors that can affect the price of coffee futures contracts, and these are some of them:

Weather events: Coffee plants are sensitive to weather conditions, so if there are adverse weather situations in the major producing countries, there may be a shortage of coffee, which will affect the prices.

Political instability: Just Brazil and Vietnam alone account for about 50 percent of coffee production. Any political crisis in those countries tends to affect coffee prices.

Economic growth: Growth in the emerging economies in Asia, Latin American, and Africa will increase the demand for coffee and push prices up.

Health reports: More medical evidence is indicating several health benefits of coffee. This will only increase coffee consumption and move coffee prices up.

Coffee Seasonality

Here is a chart showing the Seasonal effects on the coffee futures market:

Coffee Futures – Trading Strategies | Symbols and Contract Specifications

One thing that people may not know about coffee futures seasonality is that the demand for coffee tends to increase during the colder months. This is because people tend to drink more hot beverages, such as coffee, during the winter months to warm up. Additionally, the holiday season also tends to drive up demand for coffee as it is often consumed during gatherings and celebrations.

Another thing that people may not know is that coffee futures prices can be affected by weather conditions in coffee-producing countries. Droughts, floods, and other extreme weather events can disrupt coffee production and lead to changes in coffee futures prices.

Additionally, coffee futures prices can also be affected by political and economic conditions in coffee-producing countries. For example, if a country experiences political instability or economic downturn, it may lead to a decrease in coffee production and an increase in coffee futures prices.

Overall, there are many factors that can influence coffee futures seasonality and prices, and it is important to keep an eye on these factors to understand the market and make informed decisions.

Coffee Futures – Trading Strategies | Symbols and Contract Specifications

Seasonality is a phenomenon that affects the price of commodities like coffee. Coffee prices fluctuate seasonally due to a variety of factors, including the availability of supply and demand, weather conditions, harvest cycles, and other economic and environmental factors.

The coffee futures market is largely influenced by the supply and demand of the commodity. During harvest time, the supply of coffee increases, which leads to a decrease in prices. Conversely, if the harvest is poor, prices tend to rise.

Weather conditions can also have an effect on coffee prices. If there are unusual weather patterns in the area where the beans are grown, this could lead to a decrease in quality and thus a decrease in prices.

Harvest cycles are also an important factor in the price of coffee. If the harvest is delayed or disrupted due to weather or other factors, this could lead to an increase in prices.

In addition, economic and environmental factors can also have an impact on the price of coffee. For example, if there is an economic recession, the demand for coffee will typically decrease, leading to lower prices. On the other hand, if there is strong economic growth in the area where the beans are grown, this could lead to an increase in demand, which would result in higher prices.

Overall, seasonality is an important factor to consider when trading coffee futures, and understanding the various seasonal factors can help traders make more informed decisions when trading.

History of trading coffee futures

The history of trading coffee futures began in 1763 when the first organized commodity exchange opened in Amsterdam. Traders began to buy and sell coffee futures contracts in order to hedge their risk or speculate on the future price of coffee. This type of trading was common for other commodities, such as sugar and cocoa, but coffee was the first commodity to be traded on an exchange.

The concept of trading coffee futures was introduced to the United States in 1817 when the New York Coffee and Sugar Exchange opened. This exchange allowed traders to buy and sell coffee futures contracts in order to hedge their risk or speculate on the future price of coffee. The exchange was later renamed the New York Board of Trade (NYBOT) and is now known as ICE Futures US.

In the early 1900s, the International Coffee Agreement (ICA) was established to help regulate the international coffee market. The ICA set a minimum price for coffee and limited the amount of exports from producing countries. This caused a boom in the coffee futures market, as traders sought to take advantage of the new price stability.

The advent of the internet in the late 1990s revolutionized trading and allowed for the development of online exchanges and trading platforms. This made it easier for traders to buy and sell coffee futures contracts, and the market began to grow rapidly. By the early 2000s, coffee futures were being traded on a number of exchanges around the world, including the Intercontinental Exchange (ICE) and the London International Financial Futures and Options Exchange (LIFFE).

Today, coffee futures are a popular instrument for hedging risk and speculating on the future price of coffee. The market is highly volatile, making it attractive to both professional and retail traders. In addition, coffee futures are a popular way to gain exposure to the coffee market without having to purchase physical coffee.

Volatility of coffee futures

The volatility of coffee futures is a measure of the amount of fluctuation in the price of coffee futures. Volatility can be an important factor for traders and investors to consider when making decisions about entering or exiting a trade.

Coffee is a highly volatile commodity, with prices fluctuating greatly due to supply and demand, weather conditions, and geopolitical events. Coffee prices can be affected by a variety of factors, including changes in production, harvesting, and processing; changes in global market demand; and changes in government policies.

Most coffee futures contracts are traded on either the ICE Futures U.S. (ICEUS) or the Intercontinental Exchange (ICE). ICEUS is the most actively traded coffee futures exchange, with contracts traded in both arabica and robusta coffee. The ICEUS coffee futures contract trades in cents per pound, with a minimum tick size of 1/100th of a cent per pound.

The volatility of coffee futures can be affected by both fundamental and technical factors. The fundamental factors that can affect volatility are the supply and demand dynamics of the commodity, weather conditions, and geopolitical events. Technical factors, such as the number of open contracts, the amount of open interest, and the trend of the market, can also influence volatility.

In general, coffee futures are considered to be a highly volatile commodity, with prices often moving in wide ranges over short-term periods. As with any commodity, traders should carefully monitor the market for changes in volatility and adjust their trading strategies accordingly.

How to Get Started Trading Coffee Futures

If you want to start trading coffee futures, the first step is to open an account with a broker that offers access to the futures exchange. You will need to provide your broker with details such as your name, address, and trading experience. You may also need to deposit funds into your account to cover margin requirements.

Once you have opened your account, you can begin trading. You will need to decide whether you want to take a long or short position on the contract. You can then place an order with your broker, specifying the quantity of the contract and the price at which you want it to be executed.

It is important to remember that trading coffee futures comes with significant risks. You should always have a well thought-out trading plan in place and understand the risks of leverage. You should also keep an eye on the market and be aware of any news that could affect the price of coffee.

By understanding the basics of the coffee futures market, you can start trading with confidence. With a little bit of research and practice, you can develop the skills necessary to become a successful trader.

Conclusion

Coffee is a widely consumed beverage because of the stimulatory effects of one of its content — caffeine. Although the coffee plant is grown in over 70 countries across the globe, five countries account for about two-thirds of the world’s coffee production, so political events in those countries can have huge effects on coffee prices. Trading coffee futures contracts is the easiest way to play the coffee market.

Here is our archive with articles about other tradeable futures markets.

 


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