Trading Arabica Coffee Futures on ICE Futures US
To gain exposure to world coffee markets one strategy would be to trade Arabica coffee futures using the ICE Futures US trading platform.
Here you could be rubbing shoulders with producers and the major end users of coffee, as they hedge their sales and purchases respectively.
Arabica coffee futures did not advance as strongly as most other commodity futures in the present bull market which started around the year 2000.
In fact according to Commodities Research Bureau data, coffee prices were near their lowest since the early 1970’s at the start of the current commodities bull phase, touching around 42 cents per pound.
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Generally coffee futures prices will move in a small range for some time and then due to a sudden climatic change or unforeseen event they will surge spectacularly.
As an example, consider the all-time high in 1977 of around $3.25 per pound caused by a sharp frost in South America a clear two years earlier, when the price had been hovering around the lowly $75-80 cents range.
The growing demand for soybean and corn as sources for bio ethanol, as an alternative to petroleum derived gasoline, led farmers to switch from planting coffee trees to grains.
The resulting fall in supply and steady demand then caused the price of Arabica coffee futures to rise.
Bear in mind there is a significant lead time between new plantings and the first green coffee beans being processed and ready for roasting and the end consumer market.
This time interval can see the futures price rising strongly, and so these conditions are good for coffee commodity trading.
Trading Arabica on the ICE Futures US
So you have taken advice from your professional advisor, you have chosen a commodity trading broker and are satisfied with your preferred commodity trading system. Here are the main features of the ICE Futures US Coffee “C” futures contract, which acts as the benchmark for Arabica coffee:
Coffee “C” futures contract is settled by Physical Delivery, and is for exchange-grade green coffee beans.
These are delivered from an accredited warehouse in 1 of up to 19 countries of origin to a specified port in the US or Europe. These ports include Houston in Texas, New York Harbour, Miami, and in Europe, Antwerp, Barcelona, Rotterdam and Hamburg.
Ticker: KC
Contract size: 37,500 pounds
Months: May, July, September, December, March Tick size: 0.05 cents per pound ($18.75 per contract)
Trading times: New York: 0230 – 1515 (ET) London: 0730 – 2015 (ET)
Last trading day: 8 business days before the last business day of the delivery month
The ICE Futures US uses certain measures to grade the beans and also to taste the coffee by cup for flavour grading.
This establishes a benchmark or “basis”. All beans considered for delivery are then graded either at a premium, for those considered superior to the “basis” or at a discount for those beans which are deemed inferior.
As an example, coffee beans from Honduras, Nicaragua, Salvador, Tanzania and Peru are graded at basis.
Meanwhile, Arabica coffees from Colombia are at a premium, given basis plus 200 points, while those from Venezuela are at discounts of minus 100, while coffee beans from Ecuador and Dominican Republic are at minus 400.
With the expansion of the BRIC economies, a growing proportion of their populations are looking to enjoy consuming more coffee. Global brands names such as Starbucks have established themselves in these countries and so the trend seems to be for higher coffee consumption.
There will always be the challenge of climate threats such as freezes, droughts and very high rainfall, which can adversely affect yields.
Growing competition for land to grow other crops, such as soybean for bio ethanol, will mean fewer trees and so a lower yield of Arabica coffee beans. The volatility caused by the above factors make the prospect of trading Arabica coffee futures on the major global commodity exchanges both exciting and potentially profitable.
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