Trading Coffee in the Commodities Market

July 6, 2009 by  
Filed under Commodities Trading

Coffee is one of the most popular consumer items available for trade on the commodities market, and is ideal for investors who prefer to financially back a product they understand and consume themselves.

Over the past few years, coffee prices have steadily risen after suffering a plunge due to natural disasters causing reduced production. Producers are still trying to recover, but investors have regained their confidence in this commodity.

During the first six months of 2006, prices for coffee fell from $1.29 to $1.13. However, this doesn’t mean that everyone lost money during the time. The beauty of trading commodities is that you can still profit when prices are falling. Unlike stocks, most of the money made in commodity trading occurs with falling price points.

Brazil is the largest producer of coffee. In 2006, the country produced 36.1 million bags, or 32% of the world’s coffee supplies. Vietnam produced 11% of the supply, and Columbia provided only 10% of the world’s supply.

Vietnam has increased its coffee production in recent years, especially since the U.S. rejoined the International Coffee Organization (ICO). The USDA estimates that Brazilian coffee production will increase substantially over the next few years.

This information, found at http://dev.ico.org/trade_statistics.asp, can help develop the proper strategy in trading coffee futures contracts.

The New York Board of Trade (NYBOT) trades these commodity futures contracts. World consumption has resulted in maintained demand of coffee, and supplies still remain low today. This means that the most basic principles of investing can be applied to purchasing these coffee contracts.

The standard contract is 37,500 pounds, or 250 bags of coffee. This means that you can obtain one for a few thousand dollars, hedging your bets against rising prices in the future.

Lowered supply and increased demand causes many investors to believe prices will continue to rise in the next couple of years. Going long and purchasing contracts with future expiration dates may prove to be quite profitable for even the newest investors to the world of commodity trading.

Coffee is a great example of how the general consumer markets and worldwide levels of production and consumptions directly affect these futures prices. In the practice of trading commodities, historical patterns and standard trading strategies generally don’t apply. You need to do your homework, researching trends and speculating about the future state of the commodity contract prices.

Using an online commodity trading tool will not only allow you to research commodity prices and current fluctuations, but will also provide the ability to record relevant information and strategies. You should also look in to taking an online course or participate in webinars that will discuss example trades and strategies.

The most important part of any trading or investment strategy is to ensure you’re well diversified and hedging your investments against risk. This may require a combination of both stocks & commodities; you’ll need to decide how involved you want to be, or whether you can trust a commodities broker to carry out your strategy on your behalf.

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