Coffee traders can be broken down into two main categories: hedgers and speculators.
The price of coffee is influenced by many factors. In order to reduce the impact of these price fluctuations on growers and producers, coffee futures were introduced. Coffee futures offer these market participants a way to hedge their risk and regain control over their coffee investments.
Producers and Marketers of coffee can minimize the risk of price fluctuations in the coffee market by using a short hedge. This will set a fixed selling price for the coffee that they will produce, so that they will get the specified amount in the contract, even if prices fall in the future. Consumers can use a long hedge to set a fixed purchase price for a specified quantity of coffee as per their need.
Coffee futures are also traded by speculators. Softs traders and traders in tropical commodities are especially fond of Grade 3 washed Arabica futures.
Speculators have no vested interest in the underlying asset, that is, they will neither deliver coffee nor take delivery for coffee. They take on the price risk that hedgers are trying to avoid, because they hope to profit from the price movements. Coffee speculators buy coffee futures if they believe that the price of coffee will go up, and sell coffee futures if they believe that the price of coffee is set to go down.
Coffee Futures Contracts
Coffee traders flock to the NYMEX for electronically-traded coffee futures sold under the product symbol “KT.” Each contract, quoted in U.S. dollars per pound, represents 37,500 pounds of coffee. The minimum price fluctuation is $0.0005 per pound. Contracts are traded in the months of March, May, July, September and December for the next 23 months, and are financially settled. Coffee, like other soft commodities, trades from Sunday to Friday every week, for nearly 23 hours each day.
On the Intercontinental Exchange (ICE), coffee trades under the symbol “KC” with green beans from 19 countries of origin. The contract is physically deliverable on several ports in the U.S. and Europe. Contracts are priced in cents and hundredths of a cent. Contracts are available for the months of March, May, July, September and December.
Other popular coffee exchanges include the Tokyo Grain Exchange (TGE) for Arabica and Robusta, the Singapore Commodity Exchange (Robusta), and the Commodities & Futures Exchange (BM&F) in Brazil (Arabica).