Investing in Coffee Futures as a Widely Traded Commodity - dummies

Investing in Coffee Futures as a Widely Traded Commodity

Coffee is the second most widely traded commodity in terms of physical volume, behind only crude oil. Like a number of other commodities, coffee production is dominated by a handful of countries. Brazil, Colombia, and Vietnam are the largest coffee-producing countries.

Top Coffee Producers
Country Production (Thousands of Bags)
Brazil 42,512
Vietnam 15,500
Colombia 12,200
Indonesia 6,973
India 4,750
Ethiopia 5,000

Source: International Coffee Organization, 2006 figures

Just like choosing the right flavor when buying your cup of coffee, knowing the different types of coffees available for investment is important. The world’s coffee production is pretty much made up of two types of beans:

  • Arabica: Arabica coffee accounts for more than 60 percent of global coffee production. It’s grown in countries as diverse as Brazil and Indonesia and is the premium coffee bean, adding a richer taste to any brew. As a result, it’s the most expensive coffee bean. It serves as the benchmark for coffee prices all over the world.

  • Robusta: Robusta accounts for about 40 percent of total coffee production. Because it’s easier to grow than Arabica coffee, it’s also less expensive.

The coffee futures markets are used to determine the future price of coffee and, more importantly, to protect producers and purchasers of coffee from wild price swings and to allow individual investors to profit from coffee price variations. The most liquid coffee futures contract is available on the New York Board of Trade (NYBOT).

The NYBOT coffee futures contract is one of the oldest futures contracts in the market today. Here are its contract specs:

  • Contract ticker symbol: KC

  • Contract size: 37,500 pounds

  • Underlying commodity: Pure Arabica coffee

  • Price fluctuation: $0.0005/pound ($18.75 per contract)

  • Trading months: March, May, July, September, December