The Learn About Futures Insider for October 6, 2011: Coffee

From the plantation to the cup, coffee can be an important part of a country’s agricultural output – as well as a kick-start to the consumer’s morning. Whether the beans are destined for an intimate coffee house or a bulk instant coffee, the right mix of growing, drying, and roasting will fill the needs of caffeine lovers across the globe. The following contract specifications will refer to the Coffee “C” (Arabica) futures contract traded on the Intercontinental Exchange.

Contract Size: 37,500 pounds

Price Quote & Tick Size: Cents and hundredths of a cent per pound; minimum fluctuation is 5/100ths ($.0005) of a cent per pound or $18.75 per contract.

Contract Months: March, May, July, September, December

Trading Specs: Futures trade electronically on the InterContinental Exchange 0330 – 1400 ET. Options trade on the floor 0800 – 1330 ET.

Daily Price Limit: Currently none, but you should always consult the exchange.

Trading Symbols: KC
[You must be registered and logged in to see this image.]
Past performance is not indicative of future results.
***chart courtesy of Gecko Software
Coffee Facts
The coffee bush or tree is grown in the tropics and does best far from the touch of winter frost. Higher elevations suit coffee bushes and the best yields come with good amounts of water and fertilizer. “Beans” are actually the seeds or pits found inside the fruit of the coffee plant – the cherry. Normally red, these fruits are produced by plants which are around three to five years old, with the possibility of being up to one hundred years old. It can take seven to nine months for the berry to mature for Arabica and ten to eleven months for the Robusta. The unroasted – or green – “beans” are removed from the cherry during processing in either a wet or dry method. In the dry method, cherries are dried in the sun, a process which can take up to four weeks. They are later hulled.
[You must be registered and logged in to see this image.]
The coffee plant is native to subtropical areas of Africa and Asia but is now cultivated in countries within that zone across the globe. There are many species of coffee plant with the two most recognizable being Coffea Arabica and Coffea canephora – Arabica and Robusta, respectively. Arabica is considered to have the best quality.

Brazil and Vietnam are leaders in coffee production with the South American grower producing mostly Arabica beans and the Southeast Asian nation growing more of the Robusta beans. Brazilian harvest will typically begin in May and last through September. The arrival of coffee may then begin one to two months after harvest ends. This can, of course, vary.

Among the top producing countries, the following table shows production in 1000 60 kg bags of green coffee for the select years:
[You must be registered and logged in to see this image.]
***data courtesy USDA

Among the top importing countries, the following table shows imports in 1000 60 kg bags of green coffee for the select years:
[You must be registered and logged in to see this image.]
***data courtesy USDA

Top domestic consumption in 1000 60 kg bags of green coffee is distributed in select years as follows:
[You must be registered and logged in to see this image.]
***data courtesy USDA

Price highlights for this market include:

* In the 1950s, coffee prices were set to move higher on moderate to severe frosts in Brazil, and evidence of bean hoarding on conflict in Korea. In 1954, import firms warned that the “great Brazil frost” coupled with consumption statistics would mean demand would outpace supply. (Source: Schenectady Gazette, February 9, 1954)
* Between 1975 and 1977 prices moved from just under 50 cents a pound to more than $3.30 per pound. This rise was alternately attributed to bean shortages, potential hoarding, Brazil’s federal purchases, and export taxes. Many coffee trees in Brazil were said to have died during the frost of 1975. A coffee boycott helped bring prices back towards the $2 level.
* In 1979, another Brazilian frost and political and civil unrest in Nicaragua and Uganda led to another price rise, this time closer to the $2.25 area from about $1.25 per pound. Prices would fall sharply through 1980, eventually settling below the $1 level towards the end of 1981.
* Coffee prices spiked again in 1985 following a severe drought in Brazil. After trading above $2.50 per pound in early 1986, prices retreated back towards $1.00 per pound by 1987.
* In July of 1989, the International Coffee Organization suspended their export limits, precipitating a rapid decline in coffee prices below $1.00 per pound. Over the next few years, prices would visit the 50 cent level on more than one occassion.
* 1994/1995 saw another frost in Brazil, and signs from the South American coffee grower that it might limit exports led to a rally in prices back towards $2.50 per pound.
* Volaility remained high through 1995 into 1997 as prices touched $1 per pound and then headed towards 20-year highs as the threat of potential frost in Brazil, poor crops from other growers, and increasing demand led to forecasts for tightening supplies. Prices would trade above $3 per pound as news outlets like the New York Times reported forecasts for, “1998 deficit of 1.5 million bags of coffee.”
* 2001 brought prices to 36-year lows on a supply “glut” from Latin America. Futures prices would reach a low of nearly 41 cents per pound.
* Prices trended higher through the 2000s, and in 2011 would maintain significant trading between $2.50 and $3 per pound on concern that global supplies were tightening.


Key terms for the coffee market include:

Green beans – raw, unroasted coffee beans

ICO – International Coffee Organization – a group of producing and consuming nations who work together on coffee related issues and marketing. According to their site, “ICO exporting Members account for over 97% of world coffee production and its importing Members are responsible for around 80% of world coffee consumption.”
Key Uses

Drip, espresso, instant, decaf – coffee is consumed as a beverage hot or iced. Beans are roasted and usually ground to deliver a caffeinated treat while the fruit is discarded or used as fertilizer.

Key Concerns

International Trade Issues – Since coffee is grown in specific regions of the globe, the political situation in countries which produce it as well as trade policies in import countries can have an effect on the supply and demand of beans. The lifting of the US trade embargo against Vietnam is often cited as a catalyst in the rise of Vietnamese production and trade of coffee. Demands for fair trade coffee can also directly affect smaller farmers by guaranteeing them a minimum price per pound of coffee.

Environmental Impact – Coffee plants can be cultivated in shade under a forest canopy or with sun cultivation which may speed cherry ripening and is said to increase yields. The shade grown varieties are often considered “organic” since sun cultivation is achieved by clearing forests and may require additional water, fertilizer, and pesticides. Pressure on some modern sun cultivating coffee farms to change methods can be great.

Weather – Arabica coffee does well with evenly distributed rainfall throughout the year to a total of 40 to 59 inches. Drought can be devastating. Coffee plants do not do well with frost, either. Sunshine or lack thereof can be important after ripening for dry method processing as well since drying cannot take place in rainy weather. Heavy rains during the key blossoming times may impact yields if flowers are damaged.

Disease – Nematodes, coffee berry disease, hemileia vastatrix – like most agricultural products, coffee plants have their share of pests and disease. The Robusta variety has natural resistance to many of these while Arabica requires a bit more care.

Consumer Demand – Whether a shift to coffee consumption in traditional tea drinking cultures or an economic recession, traders are always looking for indications of overall demand.

Disclaimer: There is a substantial risk of loss in futures trading and it is not suitable for all investors. Losses can exceed your account size and/or margin requirements. Commodities trading can be extremely risky and is not for everyone. Some trading strategies have unlimited risk. Educate yourself on the risks and rewards of such investing prior to trading. Futures Press Inc., the publisher, and/or its affiliates, staff or anyone associated with Futures Press, Inc. or [You must be registered and logged in to see this link.] do not guarantee profits or pre-determined loss points, and are not held monetarily responsible for the trading losses of others (subscribers or otherwise). Past results are by no means indicative of potential future returns. Fundamental factors, seasonal and weather trends, and current events may have already been factored into the markets. Information provided is compiled by sources believed to be reliable. Futures Press, Inc., and/or its principals, assume no responsibility for any errors or omissions as the information may not be complete or events may have been canceled or rescheduled. Any copy, reprint, broadcast or distribution of this report of any kind is prohibited without the expressed written consent of Futures Press, Inc.