COFFEE and COFFEE FUTURES – fuel for body and mind

by Michael Chechnev | Feb 17, 2020 | Trading articles

Coffee is the most popular drink at the breakfast table. But not only there. What can be better than a nice cup of coffee with your loved ones? Coffee brings relaxation, moments of well-being and enjoyment!

In this article I would like to take a closer look at coffee as a raw material in the futures markets.

The coffee plant

Coffee plants grow in two varieties – Arabica and Robusta. The “cherry” that grows on the plant contains seeds – the “coffee beans” that are roasted to make coffee.

Arabica plants grow in subtropical and tropical climate zones at lower and higher altitudes:

Low altitude crops: These crops require clearly defined rainy and dry seasons and altitudes between 500 and 1000 meters. Such conditions lead to distinct growth and ripening time. Mexico, Jamaica, some areas of Brazil and Zimbabwe are countries with these conditions.

High altitude crops: These plants grow near the equator at heights of 1,000 to 2,000 meters. Coffee plants need frequent rainfall and produce two harvest seasons. Kenya, Colombia and Ethiopia are countries with a suitable climate and suitable geographical conditions.

Robusta plants usually grow at much lower altitudes than Arabica plants. Coffee producers grow Robusta in regions 10 degrees north or south of the equator at altitudes between sea level and 1,000m. Robusta plants tolerate warmer weather than Arabica plants.

The 10 largest coffee producers.

Global coffee production is measured in jute sacks that can hold 60 kg of coffee.

Global coffee production is measured in jute sacks that can hold 60 kg of coffee.

1. Brazil – 2,595,000 metric ton (5,714,381,000 pounds)
Brazil is the largest coffee producer in the world. In 2016, Brazil produced an incredible 2,595,000 tons of coffee beans. It is not surprising, because Brazil has been the world’s largest producer of coffee beans for over 150 years.

Coffee plantations in Brazil cover around 27,000 square kilometers, most of them in Minas Gerais, Sao Paulo and Parana, three southeastern states, where the climate and temperature are ideal for coffee production. The difference between Brazil and other coffee producers is that the Brazilians use the dry process (unwashed coffee), in which the coffee cherries are dried in the sun and not washed using the wet process.

2. Vietnam – 1,650,000 metric tons (3,637,627,000 pounds)
A lot of people are familiar with Vietnamese coffee, a typical drink that blends coffee with sweetened condensed milk. Vietnam is the second largest coffee producer in the world – with 1,650,000 tons in 2016 alone. While there was a slump during and after the Vietnam War, coffee remained a large part of the Vietnamese economy with the only major export being rice. Vietnam has seen a rapid expansion of coffee production from just 6,000 tons in 1975 to almost 2 million tons in 2016. This growth led Vietnam to the second place among the world’s major coffee producing countries.

3. Colombia – 810,000 metric tons (1,785,744,000 pounds)
Colombian coffee is known worldwide. However, recently the climate played a negative role in Colombian coffee production. Between 1980 and 2010, temperatures and precipitation rose slowly. Both factors endangered the climatic conditions for the production of the preferred bean variety in Colombia. It was traditionally the second largest coffee producer after Brazil, but moved to the third place due to Vietnam’s rapidly growing production. Despite the climate impact, it produced 810,000 tons of coffee beans in 2016 and remained an important player in the international coffee business.

4. Indonesia – 660,000 metric tons (1,455,050,000 pounds)
Indonesia produced over 660,000 tons of coffee beans in 2016. Indonesia chose quantity over quality method because the climate is more suitable for the production of lower quality Robusta beans (less valued than Arabica beans from countries like Brazil and Colombia). Nevertheless, the country has an ideal geographical location for the coffee plantation, as it is close to the equator and has numerous mountain regions that are perfect for coffee production.

Coffee cultivation was brought to Indonesia by Dutch colonists and continued after colonization because Indonesian climate is ideal for the plant. Coffee plantations currently cover over 1 million hectares of Indonesian territory, with over 90% of the acreage being managed by small producers.

5. Ethiopia – 384,000 metric tons (846,575,000 pounds)
Ethiopia produces large quantities of coffee beans every year, 384,000 tons in 2016 alone. Ethiopia is the geographic home of Arabica coffee, the world’s most popular bean. It is a big part of Ethiopian economy – over 28% of Ethiopia’s annual export comes from coffee – and around 15 million people are employed in coffee production.

Ethiopia has a very rich coffee culture. For more than 1,100 years, beans with a stimulating effect have been observed by farmers and shepherds whose herds happened to eat them. Since the domestication of the plant and the beginning of the coffee bean cultivation, regional variants of the Arabica bean have been developed, each with their own characteristic name and taste. The Harar, Limu, Sidamo and Yirgacheffe beans are all trademarked varieties of the Arabica bean, with the rights owned and protected by the Ethiopian government.

6. Honduras – 348,000 metric tons (767,208,000 pounds)
Honduras produced 348,000 tonnes of coffee in 2016, almost reaching the maximum harvest in 2011 of 354,180 tonnes. Honduras left other countries behind and became the leading coffee producer in Central America. However, the coffee produced in Honduras still suffers from a lack of national branding. While most people recognize Colombian or Ethiopian coffee, beans from Honduras are mainly used in blends and are therefore less recognizable to the average consumer. However, coffee remains a vital part of the Honduran economy and the coffee industry continues to provide employment and revenue to a large part of the population.

7. India – 348,000 metric tons (767,208,000 pounds)
India produced 348,000 tons of beans in 2016. Coffee growing is possible only in some parts of India – most of the cultivation takes place in the hilly areas of the south of the country. The beans are grown by small farmers in monsoon rainfall conditions and are often planted together with spices such as cardamom and cinnamon, which gives the coffee a spicy taste and aroma. In 2004, the Indian coffee brand Tata won three gold medals at the Grand Cus De Cafe Competition. Since coffee is not as popular in India as tea, 80% of the country’s coffee production is bound for export, with the main customers being Europe and Russia.

8. Uganda – 288,000 metric tons (634,931,000 pounds)
While Uganda may not come to mind when you think of coffee production, it is the Central African nation’s top-earning export with 288,000 tons produced in 2016. It left Mexico behind in 2015 to become the eighth largest coffee producer in the world. The nation grows both Robusta beans – a plant native to the Kibale forest area – and Arabica beans from nearby Ethiopia.

Coffee plays an important role in the Ugandan economy because a large part of the population works in the coffee industry. Coffee production was initially a rather unsuccessful state-controlled area. However, after the privatization in 1991, the sector rose significantly, leading to a 5100% increase in production since 1989. However, the government still keeps control over the industry, with the flow from the country being controlled by the Uganda Coffee Development Authority.

9. Mexico – 234,000 metric tons (515,881,000 pounds)
Mexico produced over 234,000 tons of coffee beans in 2016. The country mainly produces high-quality Arabica beans grown in the coastal regions near the border with Guatemala. Mexico is responsible for the majority of US coffee imports.

In the 1990s, there was a crisis in Mexico’s coffee production, when the International Coffee Agreement was terminated and global coffee prices and export quotas were no longer strictly controlled, which meant that Mexico could no longer compete in the global market. This decline in coffee prices and production led to lost income and social problems throughout Mexico. While coffee production was in decline in the 1990s and up to the 2000s, steady demand from the United States led to a recovery in the Mexican coffee market, from a historic low of 1.7 million sacks (60 kg each) in 2005 to 4.0 million in 2014.

9. Guatemala – 204,000 metric tons (449,743,000)
Guatemala produced 204,000 tons of coffee beans in 2016, and their production numbers have remained fairly constant in recent years. Coffee beans are most abundant in Guatemala in years when the temperature is between 16 and 32 ° C and at altitudes between 500 and 5,000 meters above sea level. Guatemala was the leading producer in Central America until it was overtaken by Honduras in 2011.

Guatemala came into the coffee business to find an export market to replace indigo and cochineal, two of their early exports that became useless after the invention of chemical dyes in the 18th century. At that time, the government began a policy of supporting the industry through trade and tax benefits. In the 1960s, the government pushed for greater global demand for Guatemalan coffee by establishing Anacafé (Asociación Nacional del Café), a marketing association that continues to market the country’s coffee products worldwide.

The largest importers of coffee include the European Union, the United States, Japan and Russia. The exporting countries consume about a third of the more than 150 million jute sacks annually. Brazil is the largest consumer among the exporting countries. In the United States alone, the economic impact of coffee exceeds $ 225 billion and accounts for more than 1.6% of the country’s GDP. The coffee industry produces an estimated 1.7 million jobs in the United States.

What influences the coffee price?

The top five coffee producing countries make up about two thirds of the world production, and the two largest producers – Brazil and Vietnam – account for about half of the annual production. All these countries have a history of political instability. Political crises such as leadership vacancies or corruption scandals can unsettle the markets and cause concerns about supply interruptions.

Coffee plants are very sensitive to the weather. Crops need the right combination of rainfall and sunshine to achieve maximum performance. If these conditions do not occur, the offer will be restricted and prices will increase. The fact that the majority of coffee production is concentrated in a few countries only aggravates this problem. Global warming has the potential to create long-term drought conditions in the coffee-growing countries. If these patterns continue, coffee prices can rise in the coming years.

Although the vast majority of people all over the world regularly consumes coffee, this product is not as basic as, for example, wheat or rice cereal. Therefore, patterns of discretionary income and expenditure can play an important role in the price movement.

In developed regions such as the EU and the United States, the development of unemployment and average hourly earnings could serve as an important barometer for changes in coffee consumption. Macroeconomic growth could impact coffee consumption in emerging markets. China, for example, showed a pattern of switching to Western food standards when its economy matured. Although in China there are more tea drinkers than coffee drinkers, coffee can compete with tea in the coming years.

Coffee farmers have to transport their beans to consumers and businesses around the world, and all means of transport need fuel. The oil price can have a big impact on the coffee price. Disruptions in refinery operations can lead to an increase of the petrol price. Coffee buyers should expect the prices of the goods to correlate with energy prices.

Medical professionals have provided contradictory evidence of the health effects of drinking coffee. Coffee lovers note the ability of the drink to prevent certain diseases. Moreover, coffee contains numerous antioxidants, including vitamins B2 (riboflavin), B5 (pantothenic acid) and B1 (thiamine). However, caffeine in coffee can cause anxiety and sleep disorders. It is also an addictive substance. The extent to which the public welcomes the positive or negative news about coffee can influence demand and prices for the raw material.

Commodities, including coffee, are traded in US dollars. Coffee sellers get less dollars for their product when the US currency is strong and more dollars when the currency is weak. A strong US dollar can potentially depress coffee prices, while a weak US dollar is usually good for prices.

There are three critical long-term trends that could specifically increase coffee prices:
1. Global climate change: Coffee could be a way to benefit from long-term changes in the weather. Increasingly hot temperatures and unpredictable hurricane seasons could lead to changes in the production of many cultures, including coffee.

2. Focus on healthy living: Studies in the medical community continue to show that coffee consumption brings more benefits. This news can encourage more people to drink coffee which can result in coffee price increase.

3. Growth in emerging markets: Rising wages in emerging markets have the potential to change the behavior of consumers. Discretionary items like coffee could benefit from this trend.

However, the coffee investment also hides several risks:
1. A strong US dollar could lead to lower prices.
2. Overproduction by large suppliers could depress prices.
3. The economic weakness in general could decrease the demand for coffee.

Cotton and futures markets

The New York Mercantile Exchange (NYMEX), which is part of the Chicago Mercantile Exchange (CME), and the Intercontinental Exchange (ICE) offer the Coffee C-Future contract, which is the reference for Arabica coffee worldwide.

The Coffee C contract is over £ 37,500 Arabica beans. The CME contract is traded worldwide on the electronic trading platform CME Globex and expires in March, May, July, September and December.

The Coffee contract specification

The coffee price in the spot market 2000 – 2020

To interactive COT chart

Earning money with coffee futures

In November 2019, trading coffee, we made a profit of $ 22,087.

The analysis of the COT report from October 25th. gave a long signal in the coffee futures. In the trading plan for calendar week 44, we therefore showed our entry in the trade if our entry pattern would form.

We were triggered on Friday of that week and were in the market with 9 contracts. The price developed in our direction immediately, that’s why we closed a partial position on Thursday of KW45 (November 7th) and were able to make a profit of + $19,687.

In order to secure the rest of the position, we made the stop after a price reset on Tuesday of the following week, which then brought us another profit of + $2,400.

This trade – like all our actions on the market – was discussed and showed in detail in our trading group “COT Trading”.

If you would like first-hand information about our trading planning, trades and results, become a member of our trading group “COT Trading”.

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