Coffee Commodity Trading, Follow The Arabica Coffee Aroma
With the eyes of the world on rising food prices, coffee commodity trading offers the keen trader some interesting opportunities to make profitable trades.
At times coffee has been the most actively traded commodities after crude oil, and movements in coffee futures prices are watched carefully to see how sudden weather changes can impact on crop yields.
Grown in most countries between the Tropic of Cancer and the Tropic of Capricorn, that is tropical and sub-tropical regions, this popular commodity needs a good level of rainfall.
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Climate is crucial for success in achieving good yields as well as having an optimum temperature range of between 17 and 23 centigrade and favourable soil conditions.
While there are about 60 different varieties of coffee, the main two which are of any real economic significance are Arabica and Robusta.
These are the two varieties which are actively traded as futures on the major commodity exchanges.
The US is the biggest consumer and importer of coffee in the world, while the largest producer is Brazil, producing 33.74 million 60-kg bags of coffee in 2007/8, mainly Arabica (A), with some Robusta (R).
This represented 29% of world coffee production in 2007/8, and a fall of 7% in the 2006/7 crop year.
The next biggest producer is Vietnam with a 15% world share at 17.50 m bags (R), but down 5% on 2006/7. Columbia was third with 12.40 m bags (A) and 11% share, yet down 3% on 2006/7.
Fourth largest producer in 2007/8 was Indonesia with 7.0 m bags (R;A), an increase of 5.2% over the year.
From plantation to market
Arabica, which represents about 70% green coffee bean production, is grown in warm, humid climates at altitudes above 4,000 ft, and this combined with the soil conditions helps it achieve its characteristic aromatic flavour. Arabica is mainly grown in the high altitudes of Latin America, such as Brazil, Peru, Venezuela, Ecuador and Columbia. One of the best grades of Arabica coffee in Brazil is Santos, where the beans are picked within the first 4 years of the coffee tree’s life. Normally with Arabica there is a long lead time of 4-5 years, while with the lower quality Robusta, grown in South East Asia, the beans are picked after 2-3 years.
Robusta is normally grown on land between sea level and 2,000 feet, and can cope with more volatile changes in climate, hence its name.
Drought can cause crop yields to collapse, and so lead to coffee futures prices rising. If rainfall is too high this can also lead to lower crop yields, with similar impact on prices.
Freezing can impact a crop for the current year and the following year. This is usually a problem for Arabica varieties in the higher altitudes in Latin America. Statistics show that in recent years serious freezing has happened in one in every six years in winter (June to August) months in the southern hemisphere.
Most coffee is processed using the “dry” method where the cherries are stripped off the tree and the green beans are dried and graded, ready to be shipped for roasting. A rough calculation is that about 2,000 cherries (4,000 beans) produce one pound of coffee. The characteristic flavours and aroma of coffee are developed during the roasting process, when these diverse flavours, up to now trapped in the green coffee bean, are released. Coffee commodity trading With the movement in coffee prices subject to unusual weather conditions, such as freezing, drought and heavy rainfall, the scope for volatility in price action is significant.
If you have your commodity trading system set up and have approached a broker, so that you can use an electronic trading platform, you are all set to go and look for profitable trades in coffee. On ICE Futures US there is a Coffee “C” futures contract which is the Arabica benchmark, while the exchange also offers a Robusta futures contract. Alternatively, if you use the NYSE Euronext route there are two Robusta coffee futures contracts available to trade on the LIFFE market in London, along with other soft commodities such as white sugar, raw sugar, cocoa and rapeseed. If you only want exposure to agricultural and soft commodities without trading futures directly you could invest in an agricultural ETF which tracks a soft commodity index. Other agricultural and soft commodities CornSoybeanWheatSugarCocoaRice
With the long term impacts of climate change on weather patterns and soil conditions still unclear, such uncertainty will affect supplies of coffee. Related Articles: Furthermore, with a growing population and taste for coffee increasing in China and other Asian countries, consumption is likely to remain high. Add in the concerns about greater use of land to grow grains and oilseeds for bio ethanol, then the future looks promising for coffee trading profits.
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