Coffee is one of the world’s most popular beverages and is considered among the globe’s most important of the commodities that are traded internationally. Today, the prime market for trading coffee, cocoa and sugar futures and options is the CSCE at the Commodity Exchange Center in New York. It has been in operation since 1993.
As an exchange, the CSCE is not responsible for the price coffee trades are set. However, what it does is supply a free-market and tangible venue wherein traders are able to make options and futures transactions under the laws and regulations stipulated by the Exchange.
All of the options and futures traded under the CSCE are uniform and that grade, delivery times, locations and quantities are constant factors.
The only item that is negotiable is price. With the environment espoused by the exchange, coffee prices and the prices of other participating commodities are allowed to hit their natural levels — a move that is often referred to as ‘price discovery’.
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 one of the greatest influences in determining the world supply of coffee. Aside from the weather, the price of coffee in the trading market is also subject to consumer tastes and demands.
At times when price variations are at normal levels, coffee demand is deemed inelastic. What this entails is that when the price of coffee rises, people do not necessarily reduce their intake of coffee, and that even when the price of coffee declines, consumers also do not react much differently. However, if the increase is significantly great, there is a likelihood that demand would drop commensurately, as what happened in 1977 and 1976.
The price of coffee is thereby determined by a public consensus on the Exchange floor. This is called the ‘open outcry’, where traders bid vocally, to give an assurance that every trade is transparent and competitively completed. Within the ‘open outcry’, all participants are given the chance to either sell or buy at the best price available. After which, the Exchange will distribute the prices determined to different parts of the world.
Basically, there are two kinds of market participants on the trading floor: the investors and the hedgers. The investors are those people who seek gains based on changing prices. Their orders are usually coursed via brokerage firms, or futures commission merchants, or via commodity funds managed by CTAs, or commodity trading advisors.
On the other hand, hedgers are the commercial companies that trade in the futures and options market in the hope of reducing their risk against unfavorable pricing shifts in the actual market. What hedgers do is lock in rates for futures buys or sales. Some of the pioneering hedgers included coffee makers, importers and roasters.
There is still a lot more to be learned about coffee futures trading. However, if you’ve already had experience dealing with commodity trades, this should be easier for you. Coffee is a product that can be easily tracked and for which a lot of information is available. In fact, it is considered one of the safest commodities to trade in.
Past performance is not indicative of future results. The risk of loss in trading futures contracts or commodity options can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results.