Coffee Futures

It almost behooves people to reason that coffee, just like any other comment, does actually trade on the futures markets. While it isn’t the most popularly traded commodity, it isn’t the least popular, either, and there are more than a few people, institutions, and companies plenty interested in where coffee futures are going.

All about Coffee Futures
When someone begins talking about coffee futures, they’re probably referencing the Coffee C contract. As with most commodities, there are different types of good that are often traded under one umbrella name but are not traded as a group. In oil, there are light sweet crudes and brent crudes, and in coffee there are many different beans. However, for the most part, all discussion about coffee futures is centered around the Arabica bean.

What makes the Arabica bean #1 is that it is the standard coffee bean for your average coffee pot. While some companies mix and match different types to create a blended coffee, even blended coffees are still mostly comprised of Arabica beans. The “C contract,” as it is known, is the exchange name for exchange-quality beans that are grown only in 19 different countries. These beans must be stored in exchange approved warehouses and must absolutely conform to a standard list of qualities that make Arabica coffee Arabica.

Trading Coffee Futures
The C Coffee future contracts trade under the symbol “KC” and in lot or contract sizes of 37,500 pounds of coffee beans. Since the futures market deals entirely with whole lots, 37,500 pounds is quite literally the minimum order for coffee at the CME. There are no “small” sizes here!

Because of the massive size of the contract, the price of coffee can move in units as small as 5/100ths of a penny. Thus, in order for coffee to rise in value by one cent per pound, it would have to rise by a minimum of 20 ticks on the exchange. However, since the lot size for coffee is so massive at 37,500 pounds, each minimum tick movement in the price of coffee (1/20th of a cent per pound) equates to a whopping $18.75 per contract. So, if you were to buy a contract of KC, and it was to appreciate by 1 cent per pound, your single contract would have earned you a massive take of $375 ($18.75 x 20).

Light Calendar
Because coffee is thinly-traded and supplies are condensed into mostly one major growing season, the price of coffee is quoted only in five different contract months, compared to 12 with many of the major commodities. These months are March, May, July, September and December.

The spread of the months allows for suppliers to sell their coffee through different points in the harvest season, and the final month, December, allows for a viable market at the end of the calendar year to make last minute movements before taxes are filed, and year-end earnings reports compiled.

Delivery Not Optional
Keep in mind that coffee, like many commodities, is settled in delivery, not as cash. Thus, if an investor were to hold their coffee contract until expiration, he or she would have to then pick up their coffee purchase and make good on the remainder of the purchase.

You see, since the futures markets require investors put up only a small fraction of the total price, a futures contract held to expiry would require that at the close of trading an investor pay the seller some $80,000 against their coffee that is soon to be delivered. Of course, very few speculators hold positions all the way up until market close, but it bears repeating that there is no cash settlement, you either pick up your coffee, or sell your contract before it expires.

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