Coffee Trading: An Inside Look

March 23, 2023 16:30

When you turn your coffee maker on in the morning, and the first smell of the hot beverage wakes you up, you definitely don’t think about trading coffee. However, coffee is not all about drinking. Trading coffee is a major part of agricultural commodity trading. More and more people consume coffee in their everyday routine so demand increases.

Our blog will share some interesting information about coffee as a commodity so keep reading.

Coffee: The World’s Second Most Traded Commodity 

The coffee beverage that we enjoy daily is prepared from roasted coffee beans, but you probably already know that. What you probably don’t know is that, according to history researchers, the first people that drank coffee in a similar manner were Yemenis sometime in the 1400s. Coffee beans were imported from Ethiopia via Somalia. The habit of drinking coffee became popular very quickly in the Middle East and Africa before the first Europeans had the chance to try it.  

Coffee became a global commodity in the 20th century as demand for it increased all over the world. Surveys show that almost a trillion cups of coffee are consumed every year. Coffee Arabica and Coffee Robusta are the two most grown coffee bean types. 

The largest producer of Arabica coffee is Brazil, while the largest producer of Robusta coffee is Vietnam.

Arabica Coffee: What You Should Know

Arabica coffee is made from the seeds of the Coffea Arabica plant, which can grow up to 9-12 meters tall. The plant grows in high-elevation areas and needs periods of strong sun as well as periods with lots of rain to be able to develop fruit. High quality beans come from plants that grow in high altitudes in areas such as Colombia and some regions in Central America. In these areas, coffee grows slower and takes more time to develop, allowing it to become denser and have unique flavours.

Arabica makes up the majority of the coffee consumed worldwide. Arabica averages anywhere from 1,500 to 2,200 kilograms of coffee per hectare. Arabica contains 1-1.5% caffeine per bean.

Robusta Coffee: Things to Know About It

Robusta comes from central and sub-Saharan Africa, and it was discovered in the last years of the 19th century. Robusta makes up about 30% of the coffee consumed worldwide. Some coffee lovers suggest that Robusta is considered the bitter, low-quality relative of Arabica coffee. However, experts believe that harvesting, post-processing and handling of this specific type of coffee wasn’t suitable in the past.

Robusta plants have high productivity, so farmers only need a small piece of land to make a good living while simultaneously protecting the environment. Robusta averages anywhere from 2,300 to 4,000 kilograms of coffee per hectare. Robusta contains 2-3% caffeine per bean, which allows it to withstand insect or bug attacks.

Arabica and Robusta Coffee Price Fluctuations

Beginner traders should know that Arabica prices are quoted in US cents/lb while Robusta prices are quoted in USD/metric ton. Weather conditions in coffee-producing countries, geopolitical events and exchange rates can have an impact on coffee prices. For more information regarding coffee trading, you can read our blog.

The Coffee Arabica price hit multi-year lows in 2019 and 2020 when its spot price was below $0.95. In 2021, frost in Brazil and excessive rain in Colombia put a strain on coffee supply, leading prices higher.

Depicted: Admirals MetaTrader 5 - Arabica Monthly Chart. Date Range: 1 February 2018 - 23 March 2023. Date Captured: 23 March 2023. Past performance is not necessarily an indication of future performance. 

 

Depicted: Admirals MetaTrader 5 - Robusta Monthly Chart. Date Range: 1 February 2018 - 23 March 2023. Date Captured: 23 March 2023. Past performance is not necessarily an indication of future performance.

 

Arabica and Robusta prices dropped to a multi-week low on January 11th. However, they gained ground during the next 20 days, as seen in the daily charts below. Arabica coffee prices hit a 4-month high on February 22nd this year.

Depicted: Admirals MetaTrader 5 - Arabica Daily Chart. Date Range: 26 October 2022 - 23 March 2023. Date Captured: 23 March 2023. Past performance is not necessarily an indication of future performance.

 

Depicted: Admirals MetaTrader 5 - Robusta Daily Chart. Date Range: 28 October 2022 - 23 March 2023. Date Captured: 23 March 2023. Past performance is not necessarily an indication of future performance. 

 

Brazilian coffee exports slumped in February

According to a Reuters report, government data showed that Brazilian sales of coffee declined in February, slumping by 44.3%. Media reports note that farmers withhold supplies for higher prices due to increased growing costs, especially fertilizers. Broker HedgePoint has cut its projection for Brazil's 2023/24 arabica coffee production to 42.3 million bags from 45.4 million.

The Brazilian Coffee Exporters Council (Cecafé) noted in a statement that “despite the recent recovery of arabica coffee prices in New York KCc2, current international rates are lower than in Brazil, leading coffee growers to sell locally or not at all. The Council also suggested that export volumes were also affected by an increasing demand for Robusta coffee in the domestic market, adding that “it is a situation that is likely to continue until around June or July, when the new (Brazilian) crop arrives to the market.”

Colombian coffee production rises in February, exports fall

The National Federation of Coffee Growers of Colombia announced that, after the prolonged La Nina event, registered coffee production in February rose by 10% on a year-to-year basis. However, the same report noted that coffee exports fell by 6% in the second month of the year on an annualised basis.  

Vietnam’s coffee exports dropped in February

The General Department of Vietnam Customs reported in March that the country’s coffee exports in February were down -34.2%, on an annualised basis, at 122,833 MT. According to the same report, total January-February coffee exports were down by 14.7%, on a year-to-year basis, at 283,339 MT.

Kenya implements new coffee trading regulations

Kenya is one of the largest coffee producing countries in the world. Last year Kenya produced 34,500 tonnes of coffee, with cooperatives producing 15,000 tonnes while estates produced 11,000 tonnes.

Under new regulations, the Capital Markets Authority (CMA) has become the government agency legally mandated to oversight and regulate the coffee trading at the Nairobi Coffee Exchange.

It however comes at a time when coffee production continues to decline locally from 129,000 metric tonnes in 1990 to a low of 34,000 in 2022 due to high costs, delayed payments and low market prices. National Coffee Cooperative Union (NACCU) representatives suggest that “that the move will bring sanity, fair-trading practice and eliminate collusion at the auction.”

Manage your risk when trading coffee

As with every trading instrument, trading coffee involves risk. Beginner traders face even more risk as they don’t have the necessary experience to determine the right course of action that could reduce fund losses. Losing your hard-earned money can create stress and impact your financial planning. Traders who just begin their journey should seek ways to reduce risk and not jeopardise their financial goals.

Risk management is imperative for beginner traders. Learning to use the right risk management tools should be a priority for every trader. How can beginner traders achieve that? The answer lies in finding the necessary educational resources. Before exploring the world of trading, beginner traders should do their own research and find educational materials online. There is an abundance of seminars, e-books, webinars and articles prepared by experts that can shed light on how trading works and how to avoid unnecessary risks.

Beginner traders who know how to use risk management tools have the edge over traders who are not familiar with them. Make sure you belong to the first group.

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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

Miltos Skemperis
Miltos Skemperis Financial Content Writer

Miltos Skemperis’ background is in journalism and business management. He has worked as a reporter on various TV news channels and newspapers. Miltos has been working as a financial content writer for the last seven years.