One of the more heavily traded commodities on the world exchanges is coffee. To the untrained eye, coffee may seem a somewhat abstract commodity to be traded so widely, but the volumes traded each and every day are considerable enough to make it a major player in the commodities markets. For a number of reasons, coffee is a popular choice amongst commodity traders and spread bettors alike, and provides the ideal basis for spread betting positions.
Why Spread Bet on Coffee?
Coffee, like most commodities, is an in-demand product, grown to satisfy the global demand for coffee. Of functional importance is the fact that coffee is a price inelastic good. Essentially, this means demand is not directly correlative to pricing. Whereas high butter prices might drive some price-sensitive customers towards margarine, there are no (or very limited) substitutes for coffee, and consumer demand remains evergreen in-spite of the price. Likewise, the purchasing market for end users of coffee is dominated by four predominant organisations, which ensures that there is always a wholesale demand for the bulk of the production offered on commodities exchanges.
Thus, coffee is very much a commodity of supply – if supply varies, prices are likely to fluctuate accordingly. More supply will equate to lower prices, given that the market will be flooded with coffee, whereas supply problems caused by a poor harvest or bad weather might result in a hike in prices if the market is unable to supply coffee as freely as may otherwise have been the case. This makes it relatively straightforward to interpret as far as general price direction is concerned, and comparatively moreso than many competing commodity types.
Who Trades Coffee?
Aside from private investors and hedge funds, who collectively invest billions in coffee (particularly at the first hint of a downwards movement in the dollar), coffee is bought largely by the same four corporate buyers – namely Kraft, Sara Lee, Nestle and Procter & Gamble, who collectively control the bulk of the consumer coffee markets through an array of household name brands.
As a result of both an active investment and end user trade in coffee, coffee prices are consistently maintained as demand is eternally strong.
How To Trade Coffee Effectively?
One of the most effective methods of trading coffee is to trade reflectively on the price of the dollar. Commodities are often thought to be an invaluable hedging tool against the threat of inflation, and because coffee is priced in USD, it is often considered a direct hedge against the rise of inflationary pressures. The way this works is that coffee is bought when the value of the dollar slides against other currencies, and vice versa as the institutional movers and shakers respond to the threat of inflation vs. the apparent growing strength of the dollar.
As a spread betting strategy, depending on the look of the data at any given point, it may well be advisable to buy coffee if the dollar looks to be headed for a tumble – getting in early will allow the value of your spread bet to multiply as the price of coffee gains some traction.
From a practical point of view, it’s also valuable to make sure you understand the types of coffee that can be traded, and the comparative strengths and weaknesses of each. By and large, traded coffee is either Arabica or Robusta, the former being the more expensive and more preferable from a taste perspective. It is also worth noting that Robusta is a more hardy coffee, which is easier and more cost effective to farm versus the more expensive Arabica, so it’s important to weigh up both these factors in deciding which coffee market to enter and how prices in each of these two major classifications might respond to external triggers.
Trading coffee effectively is, like with most spread betting markets, an easier theoretical proposition than it is a practical one. Nevertheless, by understanding the factors at play in the coffee markets and how prices respond to external market prompts, it can be possible to trade coffee effectively and profitably through your spread betting company.