How to Trade Coffee Futures
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 financial markets.
In this article, we will examine this commodity, discuss coffee futures in detail, how you can trade them and much more!
Types of Coffee
Before we look at how to trade coffee futures, 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 has 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.
What Are Futures Contracts?
A futures contract is a legal agreement between a buyer and seller to exchange a commodity, or another asset, for a fixed price on a specified date in the future.
Futures contracts are bought and sold on futures exchanges and are standardised for both quantity and quality, depending on the underlying asset and the futures exchange upon which it is traded. This basically means that each contract has the same specifications, regardless of who is buying and selling. This type of standardisation makes futures easier to trade and, therefore, improves liquidity.
The buyer of the futures contract is undertaking to purchase and take ownership of the underlying asset upon expiration of the contract. The seller, on the other hand, obliges themselves to sell and deliver the underlying asset upon the contract’s expiration.
The exchange takes place at the predetermined price regardless of the current market price at the time of the contract’s expiry.
As well as being a tool for hedging against adverse future price movements, futures can also be used for speculation. Speculating on the price of commodities using futures is logistically easier than just purchasing the physical commodity, due to the fact that traders do not have to store or manage delivery of the goods in question.
This means that many of those who trade futures contracts have no intention of taking or delivering ownership of the underlying asset, but are merely attempting to profit from movements in its price.
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Trading Coffee Futures Explained
Now we better understand the types of coffee which are traded on the commodities markets and what a futures contract is, let’s put the two together and look at coffee futures contracts.
It is possible to trade futures contracts on both arabica and robusta coffee beans.
As we mentioned in the previous section, futures contracts are standardised depending on the underlying asset and the exchange where it is bought and sold. This means that the mechanics of trading coffee futures on arabica and robusta are different.
Arabica futures are exchanged on the New York Board of Trade (NYBOT) with contract expiration dates occurring in March, May, July, September and December.
The contract size is 37,500 lbs. This means that one arabica futures contract is equal to 37,500 lbs, no more, no less. Contracts are priced in US cents (USX) per lb.
Robusta futures are traded on the Intercontinental Exchange (ICE) London, with contracts expiring in January, March, May, July, September and November.
One robusta futures contract is ten metric tons in size and they are priced in USD per metric ton.
What Affects the Price of Coffee?
As with any asset, the price of coffee is influenced by its global demand and supply. Whilst demand and supply 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.
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 the 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, this effect on supply can have a significant knock on effect on price.
The following price chart of Arabica illustrates this point very well.
Depicted: Admiral Markets MetaTrader 5 - Arabica Daily Chart. Date Range: 25 April 2012 - 24 April 2015. Date Captured: 4 February 2021. Past performance is not necessarily an indication of future performance.
On 7 November 2013, indicated by the vertical red line, arabica prices fell to their lowest level in over seven years. This was largely caused by ideal weather conditions in Brazil, which produces around 45% of the world’s arabica, leading to a bumper crop the previous year. This increase in global supply pushed prices downwards, culminating in the low which can be seen on 7 November.
However, you will note that in the months following this low, arabica prices surged upwards. This was, again, largely caused by weather in, again, Brazil.
In the first months of 2014, southern Brazil, where the majority of the country’s coffee is grown, suffered a severe drought. This, coupled with the hottest January on record, ruined a great deal of the crop which contributed to the spike in prices which you can see in the chart.
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 of the other.
If we continue from our example above, on 7 November 2013, the price of arabica was around $1.01 per pound. If we look at the historic price chart for robusta below, the second vertical red line indicates 7 November 2013, when robusta prices were around $0.66 per pound.
Depicted: Admiral Markets MetaTrader 5 - Robusta Daily Chart. Date Range: 1 July 2009 - 11 April 2016. Date Captured: 4 February 2021. Past performance is not necessarily an indication of future performance.
If we head back to 3 May 2011, indicated by the first red line above, robusta prices were around $1.18 per pound, compared with $3.05 per pound for arabica on the same date.
In other words, in 2011, arabica coffee was $1.87 more expensive per pound than robusta. But in 2013, this price difference reduced to just $0.38 per pound, making arabica appear much cheaper than before when compared to its less flavoursome counterpart.
This change in the difference of price would have made arabica more desirable for those previously demanding robusta and most likely contributed to the subsequent spike in arabica prices in 2014.
This is an example of how changes in price can cause a switch in demand between the main two types of coffee.
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Plant disease, like weather, is a potential danger which most soft commodities are at risk of. As we have already seen above, in 2014 arabica prices rose steeply.
As well as adverse weather conditions in Brazil, the increased outbreak of a disease known as “Coffee Leaf Rust” in Central America also contributed to lower supply and a subsequent rise in price. This was especially prevalent in Guatemala, with officials estimating that 70% of the country’s coffee crop in 2013 was affected by the rust.
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 arabica coffee futures.
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 Admiral Markets
Whilst it is not possible to trade futures contracts with Admiral Markets, it is possible to trade Contracts For Difference (CFDs) on both coffee and coffee futures.
A CFD is a contract between two parties which agrees to exchange the difference in the value of an asset between the date the contract is opened and the date it is closed. Like futures contracts, CFDs allow traders to attempt to profit from both rising and falling prices whilst also benefiting from the use of leverage.
Futures CFDs, therefore, allow traders to speculate on the prices of both arabica and robusta futures. With most CFDs, there is no expiration date and the contract is closed at the trader’s discretion.
However, as futures contracts do have an expiry date, CFDs on futures contracts will also expire on the same date. The difference being that, unlike futures contracts, CFDs are purely speculative, meaning that if a trader is holding a futures CFD on the expiry date, they are not required to exchange the underlying asset.
Moreover, trading futures CFDs means traders are not bound by the same specifications regarding contract size. Whereas arabica futures contracts are fixed at 37,500 lbs per contract, arabica futures CFDs can be traded in increments of 1,000 lbs. Likewise, robusta futures contracts which are set at 10 metric tons, can be traded in increments of 1 metric ton with CFDs.
In order to trade coffee futures CFDs with Admiral Markets, you will need to follow these steps:
2. Download the MetaTrader 5 trading platform
3. Open MetaTrader 5 and log in
4. Press Control + M to bring up the ‘Market Watch’ window
5. Press Control + U to bring up the available trading symbols
6. Select ‘Commodity Futures CFDs’ on the left, select your desired futures CFD and then select ‘Show Symbol’, as shown below:
Depicted: Admiral Markets MetaTrader 5 - Symbols
7. Locate the relevant symbol in Market Watch, right click and select ‘Chart Window’ to open a price chart
Depicted: Admiral Markets MetaTrader 5 - Coffee Arabica Futures CFD Daily Chart. Date Range: 15 November 2019 - 4 February 2021. Date Captured: 4 February 2021. Past performance is not necessarily an indication of future performance.
8. To place a trade, right click the chart, select ‘Trading’ and click on ‘New Order’
Depicted: Admiral Markets MetaTrader 5 - New Order
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, the basic mechanics of trading coffee futures and how you can trade them with Admiral Markets via 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 Admiral Markets, you can do just that.
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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.