Coffee Futures Trading For Beginners

Coffee is the world's most popular non-alcoholic beverage and is considered to be the globe's most important internationally traded commodity. Coffee futures trading is therefore potentially very lucrative.  The Commodity Exchange Center in New York (CSCE) is the prime market for trading coffee, cocoa and sugar futures and options. It has been in operation since 1993. The CSCE is not responsible for the set price of coffee trades. It supplies a tangible venue where traders make options and futures transactions under the Exchange’s regulations.

All the options and futures traded (including coffee futures) are uniform and that grade, delivery times, locations and quantities are constant factors. The only negotiable item is price. Coffee prices and the prices of other commodities are allowed to hit their natural levels in coffee futures trading. This is referred to as 'price discovery'.

The Economics of Coffee Futures Trading

Trading coffee futures has a strong demand because its supply is relatively abundant, depending mostly on weather conditions, that's why coffee is grown primarily in areas with subtropical climate.

Weather is the greatest determining factor with consumer tastes and demands a close second. At times price variations are static, coffee demand is deemed inelastic. This means the price of coffee rises, but people do not reduce their coffee consumption. When the price of coffee declines, consumer consumption does not change. If the increase is significant, the demand drops commensurately, as happened in 1977 and 1976. So coffee futures trading can be changeable.

It is important that new traders understand these facts when they trade. In other commodities, the demand and supply are directly related. When the price goes down, the demand increases, coffee does not move this way and coffee futures trading is therefore different from other futures trading.

How Coffee Futures Trading Works

The price of coffee is determined by public consensus, the 'open outcry', on the Exchange floor. The floor is where coffe futures traders bid vocally, to give an assurance that every trade is transparent and competitive. Within the 'open outcry', participants choose whether to sell or buy at the best price available. After which, the Exchange will distribute the prices determined to different parts of the world.

The purpose of the ‘out cry' is to reduce the chances of one faction gaining a monopoly over others. This prevents the speculative investors using artificial bulls and bears to make a quick buck, as happens in the stock markets. It also reduces the number of non producers from grabbing and reselling options, like they do when buying milk quotas then sell them back to the farmers at an inflated rate.

There are two kinds of participants on the trading floor: the investors and the hedgers. The investors seek gains based on changing prices. The orders are coursed via brokerage firms, futures commission merchants, commodity funds managed by CTAs, or commodity trading advisors.

Hedgers are the commercial companies that trade in the futures and options market. Their objective is to reduce the risk of adverse pricing shifts in the market. Hedgers lock in rates for futures buys or sales. Some of the pioneering hedgers included coffee makers, importers and roasters.

If you have experience dealing with commodity trades, this should be easy. Coffee can be easily tracked. In fact, it is one of the safest commodities to trade in. Coffee futures trading can be very profitable.

by Julie-Ann Amos, professional writer, and owner of international writing agency www.ExquisiteWriting.com

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