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 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 Contract Specifications
Symbol
KC
Exchange
ICE
Tick Size
$18.75
Point Value
$375
Contract Size
37,500 pounds
Contract Months
March, May, July, September, December
Trading Hours (New York)
3:30 AM-2:00 PM // Pre-opens 8:00 PM
Trading Hours (London)
8:30 AM-7:00 PM // Pre-opens 1:00 AM
Trading Hours (Singapore)
3:30 PM-2:00 AM // Pre-opens 8:00 AM
Settlement
Deliverable
First Notice Day
Seven business days before first business day of delivery month.
Last Trading Day
One business day before last notice day
Last Notice Day
Seven business days before the last business day of the delivery month

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:

  • 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

Coffe Producers

Coffe Producers

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 Strategies

Coffe Trading Strategy

Coffe Trading Strategy

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.

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

How to Play the Coffee Market

Trading Coffee Futures

Trading Coffee Futures

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

 

Basis Coffee Futures Coffee Options Coffee ETFs Coffee CFDs
What it is
Agreement to exchange the asset at expiration
A right to buy or sell the asset on or before the expiration
Instruments that tracks the price of coffee but trades like stocks
Contract to exchange the difference in the price of the asset, from the time the trade is entered to the time it is closed
Where it trades
Commodity futures exchanges
Commodity exchanges
Stock exchanges
Online CFD brokers
Availability of leverage
Yes
Yes
Only with a margins brokerage account
Yes
Extra management cost
No
No
Yes
No
Expiration
Yes
Yes
No
No

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 Seasonality

 Coffee Futures Seasonality

Source

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.

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