Coffee is one of the most interesting commodities to trade. It is also usually one of the most volatile. Coffee is a member of the soft complex and most of these commodities are prone to wild swings in price.
There are two main types of coffee: Robusta and Arabica. The coffee traded on the ICE Futures contract in the U.S. is Arabica. The Robusta coffee beans are considered to have more bitterness and it also contains more caffeine.
The Arabica bean is considered a higher quality bean and is used at Starbucks and for premium coffees.
For the matter of trading coffee, we will concentrate on the Arabica beans. The fundamentals of Robusta can affect Arabica prices because Robusta is a very close substitute.
Arabica beans are predominately grown in Brazil, while Columbia is the second largest producer. They are also grown in Central America, but most coffee traders focus on Brazil when they are trading coffee.
Coffee grows on small trees, so the crops are in the ground all year. This makes them susceptible to the elements of weather. The trees have to flower during the spring to produce a good crop. It is important to have good weather during this period.
Weather plays a big role in coffee production. Prolonged periods of excessive moisture or dry weather need to be watched. These events can affect yield numbers. However, the biggest threat to coffee production is frost or a freeze.
Remember, their growing seasons are the opposite of the U.S. since they are in the southern hemisphere.
Most of the biggest moves in coffee prices happen because the trees are damaged from cold weather. Be very careful trading coffee futures if the weather forecasts are calling for extreme cold weather.
Coffee can move very quickly and higher than many expect if a freeze hits the growing region of Brazil.
The demand side also plays a large role in the price of coffee. Europe is the largest consumer of coffee. They drink more per capita in Europe than the rest of the world. The U.S. is also a large consumer. Developing countries like China and South American countries are becoming more accustomed to coffee and may account for a large increase in demand in the coming decades.
Demand typically increases at a fairly reliable level. People drink coffee in good times and bad. However, if an economy falls into a deep recession, demand for coffee and basically all commodities will likely decline.