What Everybody Ought to Know To Profit From Coffee Futures

ByEdmund Peh

Billions of cups of coffee are taken every day around the world, making it one of the most popular beverages globally. This makes it a worthwhile investment commodity with a huge potential for profits. Coffee futures are, by definition, contracts that are traded on the stock exchange where the buyer agrees to take a specific quantity of it to be delivered on a predetermined date in the future. The following is some important information about investing in it.

Facts
The major suppliers worldwide include Brazil, Vietnam, Colombia, Indonesia and India. These countries dominate the coffee markets and influence the futures exchange markets as well. Despite the different regions of suppliers, 2 main kinds of coffee-beans are grown: Arabica and Robusta.

Arabica accounts for over 60 percent of the global supply and is a premium known for its richer taste. Robusta covers the remaining 40 percent of total production and is easier to grow than Arabica. Robusta is usually sold at about 70 percent of the price of Arabica and is therefore favored by the larger coffee roasting companies, including Nestlé, Kraft and Sara Lee. Do keep these figures in mind when building your investment portfolio.

What Determines Prices of Coffee?
As with most commodities in the global exchange market, the price is influenced mainly by supply and demand. However, the market forces are not only defined by the number of suppliers versus the number of buyers. The coffee-growing seasons also determine the price, as well as how long it takes to produce marketable coffee beans.

For example, when drought is expected in Brazil, or freezing in Vietnam, prices will soar due to the expectation that there will be shortage. Another factor is the political stability of the coffee-growing countries, which are all emerging economies. Their relationship with the leading buyers such as the US will also determine the price.

Currently, the rising oil prices are also raising coffee prices because of the transportation costs between the supplier countries and buyers. The distance between South America and Europe, for example, has to be incorporated into the coffee price, so you can watch the oil price trends to get an idea of how it will influence it.

Futures Contract Details
Coffee futures are traded on the New York Mercantile Exchange in dollars per pound, where one contract is for 37,500 pounds of it. The exchange ticker symbol fis KC, and comes in 5 varieties depending on the trading months of the futures which are March, May, July, September and December every year.

Pure Arabica is the underlying commodity for future contracts, and the best way to get exposure to the trading is through the iPath Dow Jones-UBS Coffee Subindex Total Return. This is an exchange traded note that can provide insights into global coffee price changes and the potential risks involved in coffee future trading.

Learn all you can about the types of coffee, futures market conditions and coffee price history before investing in coffee futures.

Edmund Peh is an expert in trading and runs the very successful and popular website about futures for beginners