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Coffee

Have you had your coffee yet?We already know that coffee beans have always been one of the most traded commodities in the world, specifically second, so why the sudden interest again? Figure 1: Summary of World Coffee In recent years, global consumption has increased at a higher rate than production due to pent-up demand. This rather large deficit in balance in the past two years puts the coffee market in an interesting spotlight. Nonetheless, arabica beans continue to be the more favored selection, with South America as the central production region, driven mainly by Brazil. Gaining Access to This Market Amongst various coffee derivatives, a coffee futures contract is the most common way to trade coffee. The 4/5 Arabica Coffee Futures (ICF) listed by Brasil, Bolsa, Balcão (B3) Exchange is an example of such contracts. For those unfamiliar with futures contracts, it is a legal agreement to buy or sell a specified asset at a predetermined price for delivery at a specified time in the future. For the ICF contract, the asset is 100 bags of 60 kilograms filled with grade 4-25 or better Arabica coffee bean produced in Brazil that is meant to be delivered in the city of São Paulo, Brazil, or a B3 accredited warehouse. The ICO’s Grading and Classification of Green Coffee states that “coffees of the highest altitudes are denser and larger in size than those produced at lower altitudes.” Loosely speaking, larger beans with higher density are better. The grade indicators refer to the number of defects found in a 300g sample. To achieve a 4-25 grade, the coffee must be classified by B3 in accordance with its rules and regulations. This grading system is more specific to Brazil-produced beans. Other coffee-producing countries have other specifications and classifications. The Trampoline Effect Figure 2: Supply & Demand Factors Historically, the ICF future prices resemble that of a trampoline, with major support lines at the 124.55 and 103.60 levels. Let us explore some of the factors that caused these jumps previously; bear in mind that consumption of Arabica beans has been steadily increasing since the 1990s. S1: Poor weather conditions in South America in 2010 Brazil suffered from poor weather conditions and faced significant problems in meeting the expected crop yield. Large producers were also considering hoarding their stocks. The problem was further exacerbated by the backdrop of record low arabica stock levels since the 1960s. S2: Drought in Brazil in 2014 Similarly, poor weather conditions caused uncertainty in crop production for the harvest year and pushed prices up. S3: Drought and frost in Brazil 2021 The effects of drought followed by a severe wave of frost in Brazil wiped out its coffee production. This was accompanied by increased freight costs and shipment issues caused by Covid-19. S4: Harvest Conditions Evidently, weather conditions pose significant downside risks to the coffee supply. Moreover, occasional coffee leaf rust coupled with increasing demand has caused spikes in coffee prices. USD and Coffee Figure 3: ICF and DXY (Inverted) As with many commodities, coffee tends to move inversely with USD. This is especially so since most coffee contracts, like the ICF, are priced in USD. When the dollar rises, coffee becomes more expensive in non-USD terms and can cause international demand to fall, and vice versa. Figure 4: ICF and BRLUSD This relationship becomes more apparent when compared to BRLUSD. Our thought process: Local Brazilian producers and manufacturers traded these ICF contracts as a hedging tool. During the physical delivery of the beans, these market participants would then have to do a currency exchange. Consequently, the impact of BRLUSD rates would have a larger impact on them. Similar Coffee Futures Contract Figure 5: ICF and KC The two contacts’ underlying assets - arabica beans - have similar grading standards. Consequently, macroeconomic factors are likely to have similar impacts on the two contract prices. The prices between the two contracts exhibit a very strong positive correlation. We can then create a spread with ICF – Coffee C (KC) Futures Contract. Figure 6: ICF - KC ICF is quoted USD per bag for a contract size of 100 60kg bags, while KC is quoted USD cents per pound for a contract size of 37,500 lbs. We can then create a spread with ICF1!/60-KC1!/0.4536/100, by converting both contracts to the same base units. The spread setup indicates that KC generally trades at a premium compared to ICF. This could be attributed to several factors, a notable one being the higher liquidity preference investors tend to have for the KC contract, which might reflect a broader international preference. It is also worth noting that ICF requires Brazil-produced arabica beans, while KC comprises beans from other countries. This could explain the uncanny coincidence between the upside bias in spread movements (Figure 6) occurring in periods identified in Figure 2 – supply-side factors driven mainly from the Brazil side. Putting into Practice Enough has been said about coffee; you must be wondering how we then use this information to set up trades. Here are some ways for consideration. Case Study 1: Directional Driven By considering current macroeconomic factors on coffee, to express a “quieter” outlook on coffee, an investor could sell the ICF future contract (ICFH4). At the present level of 206.00, with a stop-loss above 219.00 – a conservative resistant line – it brings us a hypothetical maximum loss of 219.00-206.00 = 13.00 points. As shown in Figure 2, if ICF1! Reverts to major support line 124.55, a hypothetical gain of 206.00-124.55=81.45 points. Each ICF futures contract represents 100 bags; the value of each point move is USD100. However, as we approach the main harvest period for Brazil, May to Sep, it is of paramount importance for the investor to keep a watch for any potential hiccups that could negatively affect the harvest yield. Furthermore, this is likely to be a medium-term macro-driven strategy. Case Study 2: Spread Driven Regarding the ICF-KC spread currently trading at the upper bound, an investor with a bearish short-term view that the spread will trend downwards could sell ICF futures contract (ICFH4) and buy KC futures contracts (KCH4). At the present level of 206.00 and 169.95 for ICFH4 and KCH4, respectively. Following the formula above, the spread will be at –0.31336 points. Setting the resistance at the Fibonacci 50% ratio, we have a stop loss at -0.25, which brings us a hypothetical maximum loss of -0.25-(-0.31336) = 0.06336 points. Setting the support at the Fibonacci 38.2% ratio, we set our take profit at -0.40, which brings us a hypothetical gain of -0.31336-(-0.40) = 0.08664 points. The value of each point move in ICFH4 is USD100, while KCH4 is USD375. Conclusion There are various methods to create opportunities for investors, depending on how the investor would like to view the market or what other financial assets to pair up with coffee futures contracts. What we have covered in this article merely scrapes the tip of the iceberg, and we hope investors keep a creative mindset and explore other potential options. Disclaimer: The contents of this article are intended for information purposes only and do not constitute investment recommendations or advice. Nor are they used to promote any specific products or services. They serve as an integral part of a case study to demonstrate fundamental concepts in risk management under given market scenarios. A full version of the disclaimer is available in our profile description.
BMFBOVESPA:ICF1!Short
by inspirante
10
Coffee: Caffeine's about to hit ☕The coffee price has been moving downward since February last year within the framework of the superior wave Y in turquoise. In our primary expectation, however, this descent should not last much longer. In the orange target zone between USX 144.40 and USX 136.40, it should come to the low, followed by subsequent rises. Only falling below the zone would put a spoke in the wheel. Then, the price would have to drop much further within our 35% probable alternative before the reversal sets in.
ICEUS:KC1!Long
by MarketIntel
SBUX to ~$118.74, try for a shortSBUX gave the perfect automatic re-entry after tagging the mid-point pivot and returning to our original entry. Following the rules and reloading would have already ensured you now have your full investment lots, risk free. With no downside other than a $0 gain potential it's a good chance SBUX goes for it's $118.74 target. Based on how it pivoted down straight from it's midpoint on the first touch take the bet and to try getting short at $118.74 with a tight stop. If it blows through the final d-target then there's more upside coming. But chances are we see a reversal from the d-target. Don't get greedy though and take profits early on that reversal to ensure lock in your risk.
NASDAQ:SBUXShort
by pinochleprince18
Robusta hit the target after 2 years at $28.00I don't know about you but I prefer Arabica Coffee to Robusta. It's sweeter, it's fuller and it's not that bitter. Anyways, I sent out this trade idea in September 2021! The price broke above the Falling Wedge and there were strong signs of upside. This trade idea was a slow pace and anyone who held onto this trade, most likely would have made very little money due to the daily interest expense charges. It really does add up. And unfortunately, we traders can't treat these markets like medium to long term investors who deal with derivatives. Anyways, the target hit at $28.00 and the price looks to be consolidating here before further upside. Hopefully, a new pattern forms and we can get wired back into the trade. INTERESTING FACTS ABOUT THE ROBUSTA COFFEE COMMODITY Second Most Traded Coffee: Robusta is the second most traded type of coffee, following Arabica, in terms of global market demand and trade activity. Price Determination: Robusta coffee prices are influenced by factors such as weather conditions, crop yields, global supply and demand dynamics, currency exchange rates, and geopolitical events. Use in Blends: Robusta coffee is often used in coffee blends, alongside Arabica, to provide a stronger and more full-bodied flavor profile. Coffee Exporter Revenue: Robusta coffee exports contribute to the revenue of major coffee-producing countries such as Vietnam, Brazil, Indonesia, and Uganda, driving economic activity and foreign exchange earnings.
ICEEUR:RC1!Long
by Timonrosso
Coffee SHORTCommodities Are Best Traded with Trend Following Delivering a comprehensive service of trading systems, risk management strategies and psychological guidelines allows our customers to trade in less than thirty minutes per day. Arabica coffee futures in the US traded around HKEX:194 per pound after hitting an over 6-month high of HKEX:205 on April 18th, on some profit-taking prompted by the recent rise amid low stocks and concerns that the slowing global economy could hurt coffee demand. On the supply side, the latest data showed ICE monitored arabica coffee inventories fell to a 4-1/4 month low of 700,048 bags. Meanwhile, dealers have said exports from key origins such as Brazil and Colombia were slumping. The International Coffee Organization projected another year of strong supply deficit in the coffee market, with a shortfall of 7.3 million bags, mainly due to arabica crop woes in Latin America's top producer. What moves coffee prices? There are several major factors that could affect coffee prices. If you are going to trade coffee it is important to understand the dynamics that drive prices. The ‘Big Four’ The largest buyers of coffee beans on the international markets are known as the so-called ‘Big Four’: Nestle (NESN), Kraft (KHC), Procter & Gamble (PG) and Sara Lee (SLE). Together, they purchase around 50% of all the coffee produced globally. They primarily buy Robusta beans, so their activity exerts a strong influence on prices. Climate As an agricultural commodity, coffee production is largely determined by the impact of weather conditions on sensitive crops. If the climate is conducive to growing coffee plants, prices can drop, but an unfavourable climate can cause prices to rise. This is because good weather during the growing season can increase the supply, while adverse weather conditions can damage crops or hamper their growth. As the five largest producers account for around 65% of global supply, weather conditions can have a significant effect on supply and, in turn, pricing. Arabica coffee prices soared to 10-year highs in late 2021, as drought and frost reduced output in Brazil and heavy rains affected production in Colombia. ICE-certified stocks fell to their lowest level in 22 years. Plant disease Agricultural commodities are also affected by other risks that can influence the condition of plants, such as disease. ‘Coffee leaf rust’ is a disease caused by a fungus that can devastate coffee crops. Robusta beans are more resilient than Arabica beans, which are more delicate and susceptible to damage from bad weather or disease. For example, global coffee prices rose sharply in 2013 after coffee leaf rust damaged crops in Central America and reduced supply. It was estimated that around 70% of Guatemala’s coffee production was affected. Consumer habits Coffee drinking trends are a key driver of demand and price direction. The emergence of specialty coffee shops is increasing demand for premium, artisan beans. Consumption is also changing in different parts of the world, with emerging markets such as in Asia leading demand growth because of rising incomes, changing tastes and growing populations. But the ongoing debate around the health effects of drinking coffee can also affect consumption. Although Arabica and Robusta beans have different flavours, major changes in the price for one can affect the demand for the other. If Arabica prices soar, demand for Robusta as a substitute could increase in response. Geopolitics As more than 90% of coffee is produced in developing countries, social unrest or political instability can disrupt coffee production and market sentiment. Futures prices respond quickly to geopolitical events in major producing nations. With Russia being the world’s sixth largest coffee consumer, the war in Ukraine and resulting sanctions has had an impact on coffee demand, and is expected to cause a supply surplus in the 2022 to 2023 growing season. Distribution costs The cost of transporting coffee around the world is factored into prices. Costs for fuel and shipping determine how expensive it is to distribute coffee. During the Covid-19 pandemic, high freight costs contributed to prices reaching decade highs. US dollar Commodity markets including coffee are often priced in US dollars, so the value of the dollar also affects prices. Dollar-denominated commodities become more expensive for buyers with other currencies when the dollar rises, which can weigh on demand. Meanwhile, coffee becomes cheaper when the dollar falls, increasing international demand.
CAPITALCOM:COFFEEARABICAShort
by DaveBrascoFX
Coffee Futures getting an uncommon sign of over extension.KC is hitting some fibs and speculators have been getting heavily long over the past 3 weeks as per COT data. PMARP showing a good sign of over exuberance. From what I can tell the consensus on it is that there's a big shortage and it cant go down, which is common across a few other commodities at the moment (CL etc). Consensus is rarely correct. Much of the rally on this seems to have been supported by the "Bid everything, muh fed saving the economy" narrative that popped up last month. A similar thing happened in 2008, Bear Sterns went under and JPM "saved the world", VIX got crushed to 16 (VIX is at 16.38 as of writing this) in the 4 weeks following, then we all know what happened from there. Beware of big institutions saving the world narratives.
PEPPERSTONE:COFFEEShort
by InsaneGamingGoblin
3
☕️Coffee futures (KC): third wave bull market.●● Preferred count ● Coffee Cash (KC.C), 🕐TF: 30D Fig.1 In Fig. 1 , the wave count from 02/07/2022 . At the moment, the market is in the initial stage of the development of the primary wave ③ . The alternative scenario is the same — the continuation of the formation of the wave e of (IV) , as it is marked in black . ______________________________________________ ● Coffee C®️ Futures (KC1!), 🕐TF: 6h Fig.2 The wave ① formed the shape of an expanding diagonal . There is another infrequent pattern on the chart — an expanding triangle at the position of the wave (X) of ② . Growth is expected to continue. ______________________________________________ 📚 Elliott Wave Guide & Ellott Wave Archive ⬇️⬇️
ICEUS:KC1!Long
by TradeWaves-EWA
1
Coffee C Futures ( KC1! ), H4 Potential for Bullish ContinuationTitle: Coffee C Futures ( KC1! ), H4 Potential for Bullish Continuation Type: Bullish Continuation Resistance: 214.05 Pivot: 182.95 Support: 172.60 Preferred case: Looking at the H4 chart, my overall bias for KC1! is bullish due to the current price being above the Ichimoku cloud, indicating a bullish market. To add confluence to this bias, price is also along an ascending trend line. If this bullish momentum continues, expect price to retest the pivot at 182.95, where the overlap support is, before continue heading towards the resistance at 214.05, where the overlap resistance is. Alternative scenario: Price may head back down to break the pivot at 182.95, where the overlap support is, before heading towards the support at 172.60, where the overlap support and 23.6% Fibonacci line is. Fundamentals: There are no major news.
ICEUS:KC1!Long
by Genesiv
1