FREE Guide - 5 Chart Patterns You Need to Know!

What is Coffee and how is it produced?

Coffee is one of the world’s leading agricultural exports, and is also one of the most widely traded commodities. According to the International Coffee Organization, it is the second largest source of foreign exchange for developing countries, after crude oil.

Coffee is a vastly popular and widely consumed beverage, with over 2.25 billion cups being drunk around the world every single day! Coffee contains a chemical molecule adenosine that reacts with the cells in our bodies to trigger a unique brain reaction, leading to a flood of adrenaline in our bodies. This caffeine kick creates the sense of alertness and energy, for which coffee has become such a popular drink.

coffee-futures.jpgWhile coffee is mainly consumed as a beverage, it is also sometimes used as an ingredient in recipes like tiramisu.

The coffee we drink comes from roasted coffee beans, which are the seeds of the coffee tree. The coffee plant is actually a small, evergreen bush (namely the Coffea Arabica bush) that bears fruits; coffee beans are the seeds of this fruit. Coffee trees usually grow from 15 to 30 feet tall, in spaced out rows.

Coffee is very sensitive to climatic changes, and requires very specific weather conditions. Coffee thrives in warm climates, with rains of around 70 inches in a year. Rain in the beginning of the growing season is especially beneficial to the coffee crop, but rain towards the end of the season can be harmful. Coffee plants grow best in soil with light pH levels, light shade, and absence of pests.

There are two main types of coffee beans: Arabica and Robusta. Arabica which means “from Arabia” grows mostly in southwestern Ethiopia, Sudan, Yemen and Kenya. Arabica beans are considered a premium variety and are packed with flavour, which is why they are usually used by gourmet coffee brands (and are almost always pricier than Robusta). Arabica has a sweeter, milder taste, with higher acidity and a fruitier character than Robusta. Arabica beans are also fragile, and have lower caffeine, but a longer growing cycle than Robusta.Most of the coffee beans sold in the physical market and traded in the futures market are of the Arabica variety.

Robusta is harsher, stronger and more  bitter, since it contains almost 50% more caffeine than Arabica beans. It also has a grainy aftertaste. Robusta is thus not suited to every palate, and enjoys a more niche demand. Robusta grows at a lower altitude than Arabica, is more resistant to pests and adverse weather conditions, and has a faster growing cycle. Growing mainly in Africa and Indonesia, Robusta is what you’ll find in cheaper, instant coffees sold in supermarkets.

Both Arabica and Robusta bushes can take anywhere from three to five years to bear fruit and mature. When it is ripe, the coffee bush sprouts blossoms and the small green coffee berry (the fruit of the coffee plant) containing the coffee beans turns a dark shade of red. Once the fruit is ripe, it is usually harvested by hand by a picker.

The beans are then processed by either a wet method or a dry method. Coffee manufacturers can’t lose much time between picking and processing or else the coffee beans will lose their freshness and flavour. Usually, 100 pounds of coffee fruits will yield 20 pounds of actual coffee beans.

Lower quality beans from countries like Brazil can be processed using the dry method, which is cheaper and simpler, but is considered inferior in quality to the wet method. In the dry method, which yields “natural” and “unwashed” coffee, coffee berries are laid out in the sun on a thin, dry surface and turned frequently— by hand or by machine— to dry all surfaces of the seed evenly. Usually, producers aim to wait till the moisture content in coffee pods drops below 11%-- this can take up to four weeks.

The dried beans are then stored in silos, before they are sent to mills to be sorted, graded and hulled. The dry roasting process, which has been used for thousands of years, gives coffee its distinct taste and flavour. Coffee beans that are lightly roasted have a more acidic and bitter taste, and also have a higher percentage of caffeine. Darkly roasted coffee beans on the other hand are less acidic and contain more sugar.

Higher quality beans from Central America or some parts of Africa require wet processing. The wet method is slightly different—the pulp covering the seed is removed and the bean is allowed to dry, then sorted by weight. These beans are then left in water to ferment, after which they are dried, milled, hulled and polished. They are then sorted into different grades. Milled beans yield “green coffee.” Every year almost 7 million tons of green coffee is produced.

Coffee is actually considered a “fresh produce” since it is a time-sensitive commodity, and its value is directly related to time after harvesting.  While coffee is now cultivated around the world, countries like Brazil, Vietnam, Indonesia and Colombia are the primary producers of coffee and dominate the world’s coffee markets.

Get This FREE Technical Analysis Guide!
Timing is everything, and with this guide, you'll learn how technical analysis can help find the right time to enter and exit your futures trades. Nearly 30 explanations and examples of the most popular technical analysis tools are all in this one handy guide. It's like having a futures trading mentor at your side!