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Coffee Basic Fundamentals

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Basic Fundamentals

What Market Fundamentals Can Affect The Coffee Futures? 

Coffee is an important global market. The world's largest producers of coffee are Brazil, Vietnam, Colombia and Indonesia. Brazil and Colombia mainly produce Arabica coffee. Vietnam produces Robusta coffee. Robusta is considered to be lower quality than Arabica. When you are considering a trade in the coffee market some of the basic fundamentals that you should consider are:

1. Brazil Brazil is the world's largest producer. Brazil is responsible for approximately 1/3 of the world's total coffee production. Brazil accounts for the majority of the higher quality Arabica coffee traded on the ICE. Thus, developments in the Brazilian crop have a substantial impact on coffee futures prices.

3. Freezes In the summer months (Southern Hemisphere winter) coffee futures are prone to rallies due to freezes or the threat of freezes in Brazil. Freezes affect the Brazilian crop approximately every 5 years. However, in the last 10 years, the threat from the "freeze season" has dropped significantly.

After the major freezes in the early and mid 90’s, Brazilian producers started to replant trees further north towards the equator in the states of Minas Gerais and Sao Paulo. This has effectively transferred production to a more moderate winter climate zone, and reduced the risk of freeze damage.

4. Vietnam Vietnamese coffee production has recently exploded. It is now second only to Brazil in tons of coffee exported. Vietnam has played a major role in the increase of global coffee supply that has caused the price of Robusta coffee to plummet. Lower prices have forced many Latin American producers out of business.

In 2001, Vietnam signed the United Nations International Coffee Agreement. Vietnam has also started to buy, and stockpile domestic coffee to help prop up global prices.

4. Asia Asian demand is impacting the coffee market just like it is impacting other commodity markets. China and the rest of the East continue to increasingly consume coffee, slowly gaining ground on tea, the traditional caffeinated drink of choice.

5. Technological Advances Kraft, Nestlé, Procter & Gamble, and Sara Lee are the "Big 4" roaster companies that buy about half of all the global annual production of coffee. In the past, these Big Four coffee roasters blended small amounts of robusta with arabica to pare their purchasing costs. Now, technological advances have allowed roasters to neutralize robusta's harsh, unpleasant taste. This has allowed the Big Four to significantly increase the percentage of, lower-quality robusta in their blends, substituting it for high-quality Arabica.

These are just some of the basic fundamentals to keep in mind when you are considering a trade in the coffee market. Before opening up a commodity account to trade coffee you should consult with a licensed commodity broker that follows the coffee market to discuss investment strategies.

Click here to contact a licensed commodity broker with experience in the coffee market to discuss market opportunities and trade recommendations.

Commodity trading is not suitable for everyone. The risk of loss in trading can be substantial. This material has been prepared by a sales or trading employee or agent of Van Commodities, Inc. and is, or is in the nature of, a solicitation. This material is not a research report prepared by Van Commodities, Inc. Research Department. Please view our Risk Disclosure.

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