How to Trade Coffee CFDs

Roberto Rivero

With an estimated 2.25 billion cups drank a day, coffee is definitely one of the hottest commodities on the planet. It should, therefore, come as little surprise that such an eagerly consumed commodity, is also one of the most actively traded on the commodity markets and, after soaring in price towards the end of 2021, coffee trading has become even more popular than ever.

In this article, we will examine this commodity in detail, look at the different ways of trading coffee and demonstrate how to trade coffee CFDs with Admirals!

Types of Coffee

Before we look at how to trade coffee, it is a good idea to first become better acquainted with the commodity itself, of which there are two main types: arabica and robusta. There are other types of coffee which exist, but robusta and arabica make up the vast majority of global coffee production and consumption.

The arabica bean, which accounts for around 60% of global production, is considered by many to be more premium and better flavoured, which partly explains why it tends to have a higher price. 

The robusta bean has a stronger, more bitter flavour and contains almost twice the amount of caffeine as the arabica bean. It is predominately used in both instant coffee and espresso blends.

Coffee Trading: The Different Methods

Now we have a better understanding of the types of coffee available to trade in the commodities market, what are the different methods of coffee trading?

There are many different ways in which traders can gain exposure to the commodity, each with its own advantages and disadvantages. For example, traders can always choose to invest in coffee by purchasing the physical commodity, however, this approach causes a number of logistical issues, not least storage.

Therefore, as with most commodities, coffee trading mainly takes place using derivative products. Two popular methods of trading coffee involve using coffee futures or coffee CFD trading, both of which we will look at in more detail below.

Trading Coffee Futures

Futures contracts represent an agreement between two parties to exchange an underlying asset at a predetermined price on a fixed date in the future. Traders can buy and sell coffee futures in order to speculate on the price of coffee without actually taking ownership of, or delivering, the physical commodity itself.

Coffee futures contracts are traded on futures exchanges and are standardised for both quantity and quality, meaning that every contract is the same regardless of who is trading them.

The specifications and pricing of coffee futures are different for each type of coffee, as examined in the table below:

Coffee Futures Contracts Specifications
Arabica Coffee Futures Robusta Coffee Futures

Arabica coffee futures are exchanged on the New York Board of Trade (NYBOT) with contract expiration dates occurring in March, May, July, September and December.

Robusta coffee futures are traded on the Intercontinental Exchange (ICE) London, with contracts expiring in January, March, May, July, September and November.

The contract size is 37,500 lbs and contracts are priced in US cents (USX) per lb.

One robusta futures contract is ten metric tons in size and they are priced in USD per metric ton.

As we can see from the information above, the size of one contract of both types of coffee is large and, although futures can be traded on margin, these sizes may put off some commodity traders, particularly beginners. Furthermore, as coffee futures have an expiry date, they are less appropriate for longer-term exposure.

Coffee CFD Trading

Contracts for Difference (CFDs) represent an agreement between two parties to exchange the difference in price of an asset between the time the contract is opened and closed.

Coffee CFD trading allows traders to go both long and short on coffee prices, whilst also benefitting from the use of leverage. Furthermore, with coffee CFDs, traders do not need to worry about expiry dates, although they do need to be aware of the “swap” fee, which is charged on positions held open overnight.

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What Affects the Price of Coffee?

The price of coffee is influenced by its global levels of supply and demand. Whilst supply and demand can sometimes be difficult to predict, there are certain factors which directly influence both of these things, some of which we will look at in the following sections.

Weather

For any agricultural, or soft, commodity, the weather plays a huge role in its production and, subsequently, its price.

Adverse weather conditions in a coffee producing region can severely hamper global supply and, similarly, good weather conditions can lead to bumper crops, boosting global supply. With 65% of global coffee production taking place in only five countries, weather can have a significant knock on effect on price.

Depicted: Admirals MetaTrader 5 - Arabica Daily Chart. Date Range: 12 August 2019 - 25 April 2022. Date Captured: 25 April 2022. Past performance is not necessarily an indication of future performance.

 

This recent surge in price of arabica coffee, shown in the chart above, can be largely explained by weather conditions.

In 2021, Brazil, which is the largest producer of arabica coffee in the world, had its production severely hampered by both drought and frost. Furthermore, Colombia, the world’s second largest producer of arabica coffee, battled excessive rains in its coffee regions.

This strain on global supply caused coffee prices to soar throughout 2021, reaching ten year highs in the process.

Substitutes

Although having a different taste, the two major types of coffee bean remain close substitutes. This means that changes in the price of one can lead to a change in demand for the other.

Continuing with the recent example above, whilst the restriction on global supply of arabica led to a rise in its price, the price of robusta soon followed suit, as demand for the cheaper substitute rose.

Depicted: Admirals MetaTrader 5 – Robusta Daily Chart. Date Range: 15 August 2019 – 25 April 2022. Date Captured: 25 April 2022. Past performance is not a reliable indicator of future results.

 

Plant Disease

Plant disease, like weather, is a potential danger which most soft commodities are at risk of.

In particular, coffee is at risk of a disease known as “Coffee Leaf Rust”. In 2013, global coffee prices rose sharply after an outbreak of coffee leaf rust affected much of Central America’s coffee production. In Guatemala alone, officials estimated that 70% of the country’s coffee production was hampered by the rust.

Depicted: Admirals MetaTrader 5 – Arabica Daily Chart. Date Range: 12 February 2012 – 5 November 2013. Date Captured: 25 April 2022. Past performance is not a reliable indicator of future results

 

The robusta beans come from a much more resilient plant than that of arabica, which is more delicate. This means that the plant which bears arabica beans is a lot more susceptible to having its crop ruined by either adverse weather or plant disease, something which should be borne in mind if trading coffee arabica.

Political Instability 

With over 90% of coffee production taking place in developing countries, mainly South America, political instability or social unrest could affect coffee production. As such, the coffee futures market tends to react very quickly to any hint of these types of situations emerging from one of the main coffee producing nations.

The “Big Four”

About 50% of all coffee produced worldwide is purchased by Nestle, Kraft, Procter & Gamble and Sara Lee, who are sometimes known as the “Big Four” coffee roasters.

These companies primarily purchase robusta coffee and, due to the sheer size of their collective consumption, any change in their demand can affect the price of coffee.

How to Trade Coffee CFDs with Admirals

Whilst it is not possible to trade futures contracts with Admirals, a Trade.MT5 account allows users to trade coffee CFDs on both arabica and robusta, as well as trade CFDs on coffee futures.

In order to start coffee CFD trading, you will need to follow these steps:  

  • Open a Trade.MT5 account with Admirals
  • Download and open the MetaTrader 5 trading platform
  • Press Control + U to bring up the available trading symbols and search for either robusta or arabica find the relevant coffee CFDs. Once found, click ‘Show Symbol’ and then ‘OK’
Depicted: Admirals MetaTrader 5 - Symbols

 

  • Locate the relevant symbol in Market Watch, right click and select ‘Chart Window’ to open a price chart
  • To place a trade, right click the chart, select ‘Trading’ and click on ‘New Order’ in order to send a buy or sell order to the market and start coffee CFD trading!
Depicted: Admirals MetaTrader 5 - Arabica Daily Chart - New Order. Date Range: 23 August 2021 - 25 April 2022. Date Captured: 25 April 2022. Past performance is not a reliable indicator of future results.

 

Final Thoughts

Trading coffee, and other commodities, can be a good way to diversify your portfolio away from more common assets such as stocks and Forex.

You should now be familiar with the commodity coffee, some of the factors which influence its price and how to trade coffee CFDs.

If you are new to trading, or want to test a new coffee trading strategy, it is recommendable to practice on a demo trading account prior to heading for the live markets. Luckily for you, with Admirals, you can do just that.

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With a demo trading account from Admirals, you can practice coffee CFD trading in real market conditions using virtual currency until you are ready to make the transition to the live markets! Click the banner below to open an account today:

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About Admirals

Admirals is a multi-award winning, globally regulated Forex and CFD broker, offering trading on over 8,000 financial instruments via the world's most popular trading platforms: MetaTrader 4 and MetaTrader 5. Start trading today!

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.

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