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Trading Coffee
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.
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