The coffee industry, valued at over 100 billion US dollars annually, boasts a thriving global market and is regarded as one of the most highly traded and consumed soft commodities worldwide. Coffee trading presents lucrative opportunities for traders, as it can be influenced by various external factors, including the prices of other commodities.
In this article, we will explore the process of trading coffee, delve into its historical significance as a soft commodity, and analyse the factors that impact its price, while also discussing the available trading options.
The Historical Background of Coffee Trading
Coffee, classified as a soft commodity, is an agricultural product that shares similarities with other crops. Unlike hard commodities, which are extracted or mined, coffee is grown naturally.
It has been an essential part of diets across the globe for centuries. Originating in the Middle East, coffee gained popularity as a beverage in the 15th century.
European merchants discovered the flavourful bean in the 17th century, leading to the emergence of coffee trading. Merchants often gathered in coffee houses, which served as meeting places for trade discussions.
Over time, coffee plantations established by European colonists transformed into modern coffee suppliers. Today, the industry produces approximately 170 million bags of coffee beans each year, offering significant potential for traders.
Distinct Coffee Varieties
The global coffee trade primarily revolves around two main types of coffee: Arabica and Robusta. These varieties possess unique flavours and are influenced by external factors that impact their respective prices. To determine which type of coffee to trade, it is crucial to comprehend the factors that affect the price of each variety.
source: coffeefriend.co.uk
Arabica coffee, renowned for its superior quality, is favoured by cafe chains and features prominently in high-quality roasted coffee blends. Despite the common perception that Arabica is consistently more expensive than Robusta, this is not always the case. Arabica beans account for 60-70% of the world’s coffee supply and are predominantly sourced from Brazil and Colombia. Arabica coffee tends to exhibit more stable price fluctuations.
Robusta coffee, distinguished by its higher caffeine content, thrives in warmer climates and at lower altitudes compared to Arabica. It generally possesses a more bitter and earthy flavour profile, in contrast to Arabica’s acidity and fruitiness.
Robusta accounts for around 30% of the coffee trading market and often trades at higher prices due to its demand among multinational corporations like Nestlé, which utilise the beans in global product lines such as Nescafé instant coffee. Vietnam is the primary producer of Robusta beans.
Coffee Cultivation Regions
The specific geographic conditions necessary for coffee cultivation define the “coffee belt.” This belt extends from the equator to the Tropic of Cancer in the north and the Tropic of Capricorn in the south.
source: shopify.com
Although coffee of various types can be grown at different altitudes, the major coffee-producing nations include Brazil, Vietnam, Colombia, Indonesia, and Ethiopia.
Coffee trading occurs worldwide, with the largest importers of beans being the European Union, the United States, Japan, Russia, and Canada.
Given the multifaceted process of growing, harvesting, roasting, and transporting coffee, the coffee trade is subject to speculation and influenced by numerous factors that affect its price. Gaining familiarity with these fundamental aspects of the market is essential to master coffee trading.
Factors Influencing Coffee Prices
The intricate nature of coffee production, which involves planting, growth, and harvesting, means that multiple factors must align for coffee to reach the market successfully and be traded.
Unexpected triggers can swiftly disrupt the coffee trading market, resulting in volatility. While volatility offers short-term profit opportunities for traders, those seeking stability may prefer to engage in coffee trading with a more consistent price index, utilising trends as guidance.
Climate: Unforeseen climate conditions, such as frost, floods, or droughts, can devastate crops, driving up prices as suppliers struggle to meet demand. Conversely, favourable weather can result in an oversupply of coffee beans, causing prices to plummet.
Consumer habits: Contemporary consumer preferences and evolving coffee culture impact the demand side of coffee trading. Specialised coffee varieties and concerns about caffeine’s effects and addictive properties have influenced prices. Additionally, during financial downturns or reduced consumer spending, the coffee trade may be negatively affected.
Plant disease: Coffea plants are susceptible to climate and disease, with fungal infections like “coffee leaf rust” posing significant risks. Robusta coffee, being more resilient in the face of such diseases, can affect the prices of both major coffee bean types.
Oil market: The prices of coffee transportation are influenced by the oil market, given that major coffee producers (e.g., Colombia, Brazil, and Vietnam) are located far from the main coffee-consuming regions. Spikes in oil prices subsequently impact coffee trading costs.
Distribution costs: Apart from transportation-related expenses, shipping and freight costs also play a role in the coffee trade’s dynamics and overall pricing.
Geopolitics: Geopolitical issues and instabilities in coffee-producing developing nations, which constitute a significant portion of the global supply, can cause price fluctuations. Similarly, political crises in major consumer nations can drive changes in demand. For instance, the Russia-Ukraine war has impacted Russia’s coffee consumption.
US dollar: Like many commodities markets, coffee trading is priced in US dollars. Fluctuations in the value of the US currency consequently influence the commodity’s price.
Coffee Trading Methods
For those interested in coffee trading, selecting a preferred trading method is the first step.
Spread betting on coffee: This financial derivative allows speculation on coffee’s price movements as an asset. Spread betting on coffee is tax-free in the UK and particularly suitable for short-term trading.
Coffee CFDs: Similar to spread betting, trading coffee CFDs involves trading the difference between the opening and closing positions of a contract, reflecting the coffee market’s price movements. At the contract’s end, the parties exchange the difference, resulting in either profit or loss. Coffee CFDs are taxable in the UK and involve leveraging or margin rate trades, offering the potential for increased profits but also carrying higher risks of losses.
Coffee futures: Trading coffee futures is a popular method that capitalises on the volatility of the coffee market. This approach establishes an exchange at a predetermined future date for a fixed price, enabling traders to benefit from market movements.
Ready to Begin Coffee Trading?
VT Markets provides a user-friendly trading environment, simplifying the process of starting your coffee trading journey.
You can initiate your coffee trading experience by signing up for a free demo account, allowing you to practice trading coffee CFDs and futures on a risk-free platform for 90 days.
Alternatively, you can create a live trading account to jump straight into the action.
If you need guidance on opening your coffee trading account or wish to establish your trading portfolio, feel free to contact us. We are here to assist you in embarking on your trading endeavours.
Summary:
Coffee trading is a highly profitable market worth over 100 billion US dollars annually.
Coffee, a soft commodity, has a rich history as an agricultural product and has been traded for centuries.
Arabica and Robusta are the main types of coffee traded globally, each with its own flavour profile and price dynamics.
Coffee is primarily grown in the “coffee belt,” with major producers including Brazil, Vietnam, Colombia, Indonesia, and Ethiopia.
Various factors influence coffee prices, such as climate conditions, consumer habits, plant diseases, the oil market, distribution costs, geopolitics, and the value of the US dollar.
Traders can engage in coffee trading through spread betting, coffee CFDs, or coffee futures.
