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.
KC1! trade ideas
Coffee - SHORTSeasonal tendencies are working against this, paired with U$D pressures as those continue to build.
Beyond that, world production is in steady decline with visible crisis levels looming on the horizon (within a decade). This is mostly due to radically increased UV levels in coffee growing regions, paired with a rapidly declining global work force.
Coffee completes wave 1The coffee futures were spotted completing a five-wave advance beginning in Oct.2023 and ending in Nov.
The coffee price is now in a wave 2 corrective phase. The 158 and 155 levels shall be the crucial support levels going forward since they are the 50% and 61.8% retracement levels of the wave 1 rise respectively.
The 3rd wave price target is projected around the 190 zone.
Note*- This post is for educational purpose only
Another FVG long setup on coffeeSee chart for prior entry methods, Another FVG long setup on coffee,
blue and yellow areas on chart are weekly fair value gaps
COFFEE Overextended Supply-Demand AnalysisOverextended Market
-Price created many RBR in a row which
gave us the ability to draw aggressive upward ML.
-Market overextended and potentially elastic band effect.
-Price broke aggressive ML
-Price removed 2 opposing RBR demand
Am not too sure about a HTF (W or D) but I still
nice little RBD that could also be used as a HTF
Long Dec Coffee KCZ market on open; Stop 151.50; Target 163.90Long bias technical indicators point to potential short term move higher
Sell Dec Coffee Stop Limit at 149.25 to enterTechnicals indicate short bias, short term 2 days - 2 weeks
15$ rise for Coffee futuresWe think Coffee might rise 15$ in price in coming weeks. It presents good opportunity for buying with a tight stop.
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.
NEW YORK ICE COFFEE:Maintain our bearish outlook We maintain our bearish outlook. The market is swinging within a descending channel.
ONLY a clear close above KP will abort the bearish scenario and clear the path for a strong rally.
Coffee price will decreaseHere are some information that can decrease coffee price in the short term:
A bumper crop of coffee beans: If there is a bumper crop of coffee beans, this will lead to an increase in supply and a decrease in prices. This is because the market will be flooded with coffee beans, which will drive down the price.
A decrease in demand for coffee: If there is a decrease in demand for coffee, this will also lead to a decrease in prices. This could happen if people start drinking less coffee or if the price of coffee becomes too high.
Government intervention: Governments can also intervene in the coffee market to stabilize prices. This could involve buying coffee beans to increase demand or selling coffee beans to decrease supply.
Improved coffee production: If coffee producers become more efficient, this could lead to a decrease in prices. This is because the cost of production will go down, which will allow producers to sell coffee beans for less money.
New coffee substitutes: If new coffee substitutes are developed, this could lead to a decrease in demand for coffee. This is because people may switch to the substitutes, which will drive down the price of coffee.
Entry: 154.30
TP1: 151.90
TP2: 147.90
SL: 157.55
Bobby's homework assignment Coffee8.2.23 This video Is about coffee which is found buyers and will probably go higher. This Market is a good exercise in drawing range boxes and that's the main reason why I posted coffee because I wanted Bobby to draw some range boxes from the past. and we mixed in a little bit of Extensions as well. My range boxes won't make any sense unless you go through an exercise like this. It's a good thing Is that range boxes don't have to be perfect... and sometimes you need to change them a little bit..... but if you learn how to do this they can help you.... and even keep you out of trades that won't be good trades. It is worth doing the exercise even if you do not trade coffee.
Coffee Bitcoin7.6.23 I'm going to start with a correction.... I referred to gold when I was looking at Bitcoin... it's Bitcoin. I'm having problems with Bitcoin because of its lack of volatility and I explain those details to give you my perspective. I made a second mistake on the Bitcoin when I was showing the range boxes on a chart with weekly bars.... not daily bars. The point I was trying to make Judging the swings inside the box and comparing the range of the bars on the current behavior Is entirely different... and it is a very significant difference to my mind. Coffee next.
KC17.6.23 In this video I'm looking for a long trade in coffee even though it looks like it may trade lower to those extensions. The reason why I picked coffee even though most people will never trade it, Is that it's a very good example of using the tools that I like to use. So don't worry if you will never trade coffee<<< you should focus on how to look for buyers and sellers, support and resistance, and. how the bars are moving. I always look to the left to examine how the market looked previously and this is critical for me and gets me clues as I look at the market in real time. This is not a waste of time, it's how I use comparisons to decide in the present.
Indexes and coffee6.26.23 This video Is about the indexes and my belief that they're going to move lower. I was looking at the ES and the Russell. I believe they are short trades but we're a little late and we should have done this before the weekend yet I believe they're going to trade lower. the other market is the coffee market and I think that it just gave A signal that you could go along with a small stop..... I do not trade this market, my students trade It and I am addressing Questions asked if I wanted my students. I didn't have the time to express what I'm going to tell you now with regard to the coffee market: I believe it's a good enough entry that it will probably trade higher and that you will have a minimal drawdown and that it will not likely hit a Small stop. I told you that I believe it could retest the breakout below the range box and that might take a day or two or more if it gets there. So if you can get in to a trade with a small stop and it moves a thousand bucks or so without stopping you out... I considered a decent entry.... but I don't really think of it as a market that's going to make new highs or even move more deeply into the range box above.... it might but I need to see the price action first. If I can take a train with a small stop and I think the market is likely to move $1,000 higher or so without hitting the small stop... it's a reasonable scalp and it's okay..... but this isn't the kind of trade where I think it'll go up Thousands and thousands of dollars it's not that kind of market until there's evidence of stronger Influence of the buyers you just don't see it yet.
KC1! Gold6.12.23 I probably should have made this Bobby's homework assignment..... I went back to take another look at gold to help me manage my Miserable state of mind... which was totally unnecessary. I added the coffee market which is moving beautifully... even though it got lower after the weekend. It's very important to understand the tools and went to take profits to avoid Drawdowns.... and also to allow you to take a profit.... let the market reverse... and then actually take a long trade. There will always be good decisions, Marginal decisions. and bad decisions<<<<Coupled with greed and fear. But this is why we use tools and strategies that help us sort it out. Everybody who trades... has losing trades.You learn to prepare for it. For example... when I go out to buy two pieces of pastry, not just one...AND A large cup of coffee... I bring some Pepto-Bismol To deal with any untoward consequences. Always be prepared.
Coffee could redefine what a bull market really isThe multi-year base in Coffee, if this is a correct chart diagnosis, could send Coffee into the troposphere. Seldom have we seen "life-of-contract" multi year bases, but this could be one
KC1!6.8.23 This is a video follow up on coffee that started out as a great long trade for my students and then the market transitioned and started going lower to the point it looked like sellers were going to prevail. However the market Started reversing and moving higher but not with Reckless abandon. It looked more like a difficult grind moving higher as opposed to a clear Bullish price Action Moving higher. It's different... and therefore it can be more difficult to trade... and or stay committed to the grind going higher. So it didn't look really bullish but the sellers weren't Pushing it lower and so we stayed with the thought that the Buyers have a slight edge over the sellers and that we should hold with a long position as opposed to Exiting the market,,,, and this paid off. It's about what the market did and what it didn't do for my perspective: It was grinding higher, but not in a very convincing way.... so that's what it was doing. And the market really didn't show any significant selling at all...So we can stay in the trade. I find these harder trades to stay in personally. But sometimes it pays to just stay in the market a little bit longer even when it's not as convincing as you would like it to be that it will stay trading in the direction that it is trading at this time when you're not enthusiastic about the price action. When the market was grinding higher... there really was no evidence if the sellers were pushing it lower.... so stay with the trade. This kind of price action and the price action.
KC1!6.7.23 This video is about the coffee market.... with a focus on Probabilities as the markets moving higher and lower.... from my perspective. This is not a science.... it's not perfect... but it helps you manage your expectations more effectively based on market behavior and patterns.
Potential Selling Scenario for COFFEEExpecting bearishness for coffee the next weeks because of the seasonality, and market structure of the coffee futures chart
GOLD5.30.23 This is a follow-up on gold. When it was near the bottom it gave a buy signal and it has moved $4,000 higher. so far it is a profitable trade. life is complicated for me because I want to buy gold if it makes a new low so that I can get a better price. The market can certainly move higher and make new highs from here... and if I don't buy the physical metals then it ends up I'll pay more money for that decision. On the other hand the market is approaching the 382 there are sellers that have gap this market lower and the buyers have not yet Tested those areas.... and if we can find a two-bar reversal or some indicator that the Market's going to at least temporarily move lower, That would give some Reassurance that we're not completely in trouble.
One more look at last night's performance5.22.23 I really did a terrible job last night.... it shouldn't have happened. This video will clean up some basic Things that you need to look for... the first being that you must know where the buyers and the sellers are. You want to short when you're approaching the sellers, But sometimes this is very difficult to do because you might think you're selling into very bullish price action and that you're going to get stopped out if you take a short. This is an issue but you will figure it out as long as you understand these issues. When you take a trade to go long... and the market is trading lower to support....i.e. you want to look for buyers figure this out. The same is true when you were shorting the market Looking for sellers to move the market lower. If you do this kind of trading you have a much higher chance of getting into the market that will trade in your direction because of those buyers that will step into the market after your entry... and so the market will not likely stop you out even though it may only go up a little bit and then trade lower. The idea is to pick Trade location that's more likely than not to at least go in your direction for a while.... it makes life a lot easier.
