Coffee ranks second in terms of total cash value on the list of most traded commodities. Trading in coffee can be one of the most exciting and volatile commodities.
Types of Coffee Beans
There are two main types of coffee: Arabica and Robusta. Arabica coffee is traded on coffee contracts at the Intercontinental Exchange (ICE) in the United States. Robusta coffee beans trade at higher prices, thanks to demand from large global customers including Sara Lee, Kraft, Procter & Gamble, and Nestlé.
Weather Effects
Coffee grows on small trees, so the crops remain in the ground year-round. The trees must bloom every spring to produce a good harvest, and it is important for the weather to be suitable for successful tree blooming during this period.
Political Stability
74% of the world’s coffee beans come from five countries, and if any of these countries experience political instability, it could affect coffee production and scarcity, and consequently prices.
Increased Consumer Demand
Demand also plays a significant role in coffee prices. Europe is the largest consumer of coffee, where individuals consume more coffee per capita compared to the rest of the world. The United States is also a large consumer. Developing countries like China and South American nations continue to get accustomed to coffee drinking and may contribute to a significant increase in demand in the coming decades.
Tips for Trading Coffee
Coffee prices can fluctuate significantly during each trading day. The extreme price volatility makes trading in coffee risky in the short term unless you can dedicate time to monitor the markets throughout the day. Successful trading also requires self-control and the ability to manage risk and exit the market quickly if the trade is not successful. It is crucial to take profits when you meet your targets, as market prices can change very rapidly.
Some traders prefer to trade coffee over the long term. This means looking for larger price movements in coffee over weeks, rather than attempting day trading in the futures market for coffee. Sometimes, you might choose to take quick profits if there is a significant market movement. However, it makes sense to look for larger movements with a three-to-one profit ratio or risk one dollar to make three dollars.
To generate income, you might consider trading coffee by selling options. Coffee options typically contain a large amount of premium built into them, given the market’s tendency for significant price volatility. This provides some protection to endure price fluctuations. However, like futures, selling options comes with a high degree of risk.
In addition to futures and options, a product like JO ETN offers another way to leverage coffee. This product is suitable for long-term trading positions. Although it can be volatile, it does not have the same degree of leverage as futures or the potential for unlimited loss exposure of uncovered options.
There are many opportunities for trading coffee, especially if you are cautious and disciplined. Do your research and create a trading plan. Get comfortable cutting losses quickly, and monitor the market over time instead of getting involved on the first day.
Source: https://www.thebalancemoney.com/trading-coffee-futures-809346
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