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.
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* 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 affects Coffee prices?
Market factors such as economic performance, weather conditions, production output, and political stability greatly affect coffee prices. For example, during the Arabica Coffee Price Crisis of 1989–1999, a prolonged period of low prices was caused by a combination of overproduction and decreased demand due to the Asian financial crisis. Other historical events that have had a major impact on coffee prices include the collapse of the International Coffee Agreement in 1989 and the Brazilian frost of 1994.
A sudden increase in demand or a decrease in supply can also have a big effect on prices. For instance, when Brazil experienced its worst drought in decades in 2014-15, coffee prices rose as production levels fell. In general, a good understanding of the current market conditions and an awareness of historical events that have had a major effect on prices in the past is essential for trading coffee. That way you can keep an eye out for potential changes in demand and supply and make informed decisions about when to buy or sell.
How to trade Coffee CFD?
Trading Coffee CFDs is a great way to capitalize on the volatility of the market and get exposure to this popular commodity. A CFD, or Contract for Difference, is a derivative financial instrument that tracks the price movements of an underlying asset without physically owning it. With Coffee CFDs, you can take advantage of both rising and falling prices without having to purchase physical coffee.
When trading Coffee CFDs, you can set up a long position if you think the price of coffee will rise and a short position if you think it will fall. With leverage, you can make larger trades than your capital would allow you to do with spot trading, where each contract is worth 1 tonne of coffee. Leverage also increases your potential profits, but it also multiplies any losses so you should be careful to manage your risk properly.
What are the other options for trading Coffee?
If you're interested in investing in coffee, you might want to consider trading coffee-related company stocks. Companies like Starbucks, J.M. Smucker Company, and Keurig Dr Pepper all offer stock that can be traded through a variety of online brokers. The benefit of trading these stocks is that they often provide access to more information than trading coffee itself since companies are required to make certain financial disclosures.
Additionally, the stocks tend to be more liquid than coffee futures contracts and can provide more consistent returns over time. Ultimately, whether you choose to trade coffee or company stocks is up to you; however, these two options should both be considered when making your decision.
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.