What Should I Know About Trading Coffee Commodities?

It's great to be able to trade a commodity where you wouldn't mind actually taking delivery.

Coffee prices have been rising for the last two years, after a substantial dip. Producers haven't completely recovered, but 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 it's just as easy to make profits in a declining market as in a rising one. Stocks, by contrast, make shorting a much more risky and difficult prospect. Investors tend to make more money on a rising stock market than a falling one.

Currently, Brazil remains the world's largest producer, 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%

But in recent years Vietnam has become a major producer, and in the two years since the U.S. rejoined the ICO (International Coffee Organization) many interesting things have been happening.

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

The USDA is estimating the Brazilian coffee crop at 44.8 million bags, up 24%. The Brazilian government is putting the estimate at 40.6 million bags. The International Coffee Organization, ICO, figures are roughly the same at 120 million bags total, with Brazil at 40.6.

For complete 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

Coffee futures contracts are traded on the NYBOT (New York Board of Trade), currently around 98 cents per pound in July 2006. The price has recently trended downward along with many other commodities. 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 the lowest in two decades at 18%. That means upward price pressure, or at least good price support.

Balance that against the fact that most commodities prices, metals and energies in particular, experienced sharp rises from 2000 to the present, while coffee fell or remained static. So, like any other commodity, coffee is a crap shoot. But, several large traders, such as Paragon Trading in New York, are expecting a supply crunch during 2007 that won't ease for at least two years.

The standard contract size on the NYBOT is 37,500 lbs (approximately 250 bags). At that size, maybe you won't want to take delivery after all, but a futures contract can be obtained for somewhere around $2,000. With world consumption steady and supplies tight coffee still makes for a viable investment.