What is Coffee?
Coffee is one of the world’s top-traded commodities, along with products like oil, gold, and wheat. It plays a vital role in the global commodities market, being a widely consumed beverage globally with a significant economic and cultural impact.
Coffee is grown in over 70 countries, but most of the world's coffee is produced by a small number of nations, including Brazil, Vietnam, Colombia, Ethiopia, and Honduras. Coffee-exporting countries rely heavily on coffee exports as a source of revenue, while coffee-importing countries often rank among the largest coffee consumers.
There are two main types of coffee: arabica and robusta, which make up most of the global coffee production and consumption.
The origins of the modern coffee futures market can be traced back to the mid-19th century, with the establishment of the Coffee Exchange in London in 1871. This marked the beginning of organised coffee trading. Today, coffee futures are traded on exchanges worldwide and attract speculators and investors who aim to profit from price fluctuations. Their participation can sometimes lead to increased market volatility.
The contract size for coffee in CFD trading is 37,500 per 1 Lot and priced in US cents per lb.
What affects the price of Coffee?
As a globally traded commodity, coffee's price can exhibit significant volatility, driven by a multitude of factors, both short-term and long-term.
Coffee pricing adheres to the fundamental economic principle of supply and demand. When demand for coffee exceeds supply, prices tend to rise, and when supply outstrips demand, prices can fall. Several factors contribute to shifts in supply and demand, including changing consumer preferences and economic conditions in coffee-producing countries.
Extreme weather conditions, such as droughts, frosts, and excessive rainfall, can impact coffee production and, consequently, coffee pricing. Poor weather conditions in major coffee-producing regions can lead to lower yields and reduced supply, causing prices to rise.
Other factors that can cause volatility in coffee prices include trade policies and tariffs. Changes in import and export regulations, or tariffs and trade agreements between countries can disrupt the trade of coffee and its cost, influencing prices.
The levels of coffee stocks and inventories in coffee-producing and consuming countries can also influence prices. High inventories can act as a buffer against supply shocks, while low inventories can lead to price spikes.
What to watch out for when trading Coffee?
- Central Bank decisions and announcements regarding interest rates and monetary policy can affect currency exchange rates, which, in turn, impact coffee prices.
- Crop Reports and forecasts from coffee-producing countries are crucial for assessing the supply outlook. They include reports on coffee blossoming, flowering, and harvesting. These reports can provide insights into the expected size and quality of the coffee crop.
- US dollar price movements: The strength or weakness of the US dollar can influence the price of coffee and other commodities. A stronger dollar can put downward pressure on coffee prices, while a weaker dollar can support higher prices.