Differences between Investing vs Trading
Differences between Investing vs Trading
Coffee has long been one of the most traded soft commodities on the planet. The marketplace is said to have a value of over $100 billion, which is why it’s such an intriguing place for retail traders to start when trading the price of commodities.
When you trade coffee, it’s important to remember this is a ‘soft’ agricultural commodity rather than a hard commodity that’s mined. Soft commodities like coffee have a distinct place in the financial markets, with coffee futures the most commonly traded on the Intercontinental Exchange (ICE). Coffee futures state a date and price at which you are obliged to buy the underlying commodity. Meanwhile, coffee options contracts give you the choice to buy or sell the underlying commodity if it hits a set price within the timeframe of the contract.
Coffee is derived from a plant grown in over 50 nations worldwide – all of which benefit from subtropical and tropical climates. Brazil is streets ahead as the world’s leading coffee producer, equating to almost two-fifths (39%) of global supply, followed by Vietnam, Colombia, Indonesia and Ethiopia. There are two primary coffee variants grown worldwide – Robusta and Arabica. Robusta is known for its bitter taste and high caffeine content. Arabica is said to have a more rounded flavour and a more ‘premium’ finish.
There are multiple factors that make coffee such a volatile commodity to trade. We’ll explore those briefly once we’ve assessed the history of the coffee price through the years.
It reached all-time highs of $3.39 per lb in April 1977 when Brazil was hit by one of its harshest frosts on record, severely affecting its latest crop yield. Just two years prior to this frost, the price of coffee was a mere $0.45 per lb. In 1989, the price of coffee plunged following the collapse of the International Coffee Agreements (ICA), which had provided a regulatory framework for coffee production since 1963. By 1992, coffee was trading at a price of just $0.50 per lb once again. It’s been on something of an upward trajectory since, trading within a range of $2-$2.60 per lb so far in 2022.
There are several influencers of the price of coffee, all of which can affect both its supply and demand:
1. Climate conditions
Coffee production is heavily influenced by weather conditions. If the climate has been favourable, the price of coffee will usually remain steady or even fall. If the climate has been inadequate, resulting in a poor yield, the price will often rise.
2. The so-called ‘Big Four’ producers
The price of coffee is largely driven by the ‘Big Four’ firms that produce half of the global supply – Kraft (KHC), Procter & Gamble (PG), Nestle (NESN) and Sara Lee (SLE).
3. Coffee leaf rust
Coffee crops can be affected by a leaf disease known as leaf rust. Any year affected by coffee leaf rust invariably affects supply.
Geopolitical events can have an impact on coffee prices too, especially when so-called ‘trade wars’ develop between nations or continents.
5. Strength of US dollar
With the price of coffee sold in USD per lb, the strength of the US dollar can also positively and negatively affect market values.
Soft commodities like coffee are ripe for short-term trading, known as scalping. With the price volatility in the coffee market much higher than many other commodities markets, it lends itself better to profiting from small fluctuations in the market. Some people who trade coffee will trade the asset within a ‘range’ known as a support and resistance range. Coffee traders will buy the asset when it’s approaching its support point, when buyers outweigh sellers, and sell the asset at its resistance point, when the number of sellers outweighs the active buyers.
Aside from coffee futures and options contracts, it’s also possible to invest in coffee-themed equities like the ‘Big Four’ we mentioned earlier. Coffee-producing firms can see their share prices rise or fall based on the size of their latest yields.
|Swap long||[[ data.swapLong ]] points|
|Swap short||[[ data.swapShort ]] points|
|Spread min||[[ data.stats.minSpread ]]|
|Spread avg||[[ data.stats.avgSpread ]]|
|Min contract size||[[ data.minVolume ]]|
|Min step size||[[ data.stepVolume ]]|
|Commission and Swap||Commission and Swap|
|Trading Hours||Trading Hours|
* The spreads provided are a reflection of the time-weighted average. Though Skilling attempts to provide competitive spreads during all trading hours, clients should note that these may vary and are susceptible to underlying market conditions. The above is provided for indicative purposes only. Clients are advised to check important news announcements on our Economic Calendar, which may result in the widening of spreads, amongst other instances.
The above spreads are applicable under normal trading conditions. Skilling has the right to amend the above spreads according to market conditions as per the 'Terms and Conditions'.
What are the risks associated with coffee commodity trading?
The risks associated with coffee commodity trading are diverse and could impact various stakeholders in the industry. Price volatility is a significant risk, as coffee prices could fluctuate greatly due to factors such as weather conditions, supply and demand imbalances, and geopolitical events. These price fluctuations could affect profitability for traders, roasters, and producers alike.
Additionally, currency fluctuations could pose risks, especially for international trading. Political instability in producing regions could disrupt supply chains and impact prices. Climate change is another concern, as it may affect its production and quality. Market speculation and manipulation also introduce risks. To mitigate these risks, participants in the commodity trading employ risk management strategies such as hedging, diversification, and staying informed about market dynamics.
What are the advantages and disadvantages of trading coffee CFDs?
Trading coffee CFDs offers advantages such as leverage, flexibility, global market access, and the ability to profit from rising and falling prices. With leverage, traders can control larger positions with smaller capital, potentially increasing profits. Coffee CFDs can be bought or sold at any time during market hours, allowing traders to quickly react to price movements and news events.
Traders can go long or short, expanding their opportunities. CFD platforms, like Skilling, provide risk management tools such as stop-loss orders to manage potential losses. However, it's important to consider the potential disadvantages, including the risk of magnified losses, market volatility, and associated trading costs. Careful considerations are recommended before engaging in CFD trading.
Are there any seasonal patterns in coffee price trading?
Yes, there are seasonal patterns in coffee price trading. Its price may be influenced by factors such as harvest seasons and weather conditions in coffee-producing regions. Historical data analysis and market observations have revealed recurring patterns in coffee price movements throughout the year. For example, during the harvest season, when there is an abundant supply of coffee beans, prices may decline due to increased availability. Conversely, during periods of adverse weather conditions or potential crop diseases, prices may rise as concerns over reduced supply emerge.
Traders often take advantage of these seasonal patterns by implementing strategies based on historical trends to anticipate and capitalize on price fluctuations in the market.
Why Trade [[data.name]]
Make the most of price fluctuations - no matter what direction the price swings and without the restrictions that come with owning the underlying asset.