Coffee Commodities Trading

Many coffee lovers enjoy more than just drinking the substance, they also enjoy trading the commodity.

After a drastic fall, coffee prices have been rising for the last two years. While producers haven't recovered completely, for the first time in several years, optimism is on the rise.

Prices fell from around 129 to 113 cents per pound over the first six months of 2006, but the good thing about commodities trading is that it's possible to make profits in a declining market as well as in a rising one. In contrast, stocks make shorting a much more risky and difficult prospect. Generally, investors make more money on a rising stock market than on a falling one.

Brazil still remains the largest producer of the world’s coffee, so as the saying goes 'as goes Brazil, so goes the world' where coffee is concerned.

2006

Million Bags

% of World

Brazil

36.1

32%

Vietnam

12.3

11%

Colombia

11.6

10%

World

112.7

100%

In recent years Vietnam has become a major producer, and since the U.S. rejoined the ICO (International Coffee Organization) two years ago, many developments have been occurring.

As estimated by the USDA (U.S. Dept of Agriculture), world production is expected to be around 123.6 million (60kg) bags in 2006-2007, with an expected use of 122.4 million bags.

The USDA estimates the Brazilian coffee crop will deliver 44.8 million bags, up 24%. The Brazilian government is putting the estimate at 40.6 million bags. Figures by the International Coffee Organization, ICO, are roughly the same, at 120 million bags total giving Brazil a 40.6% of world production.

For further details and statistics on coffee, including production amounts by type and country, historical and current prices, etc see the International Coffee Organization website at http://dev.ico.org/trade_statistics.asp

The NYBOT (New York Board of Trade) trade coffee futures contracts, currently around 98 cents per pound in July 2006. In line with many other commodities, the price has recently trended downward. But supplies remain relatively tight, with stocks being drawn down in both exporting and importing countries.

With total ending coffee stocks at 21.75 million bags, the stocks-to-use (SU) ratio is at 18%, the lowest it has been in two decades. That means upward price pressure, or at least good price support.

Many commodities prices, in particular metals and energies, experienced dramatic rises from 2000 to the present, while coffee fell or remained static. Several large traders, such as Paragon Trading in New York, are predicting a price rise as they are expecting a supply crunch during 2007 that won't ease for at least two years.

The NYBOT has a standard contract size of 37,500 lbs (approximately 250 bags). That size means that delivery would be out of the question for the average investor, but a futures contract can be obtained for somewhere around $2,000. This low outlay, along with steady world consumption and tight supplies makes coffee a popular commodity trading choice.

         

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