Coffee Futures Trading Basics

Traders of coffee futures may be in for a stimulating ride.

Traders of coffee futures may be in for a stimulating ride.

If java gets you jittery to trade, you've got coffee futures to make a play on the factors affecting worldwide coffee markets. A host of factors could be impacting coffee prices at any time: weather could threaten coffee growth, trade embargoes could be lifted or imposed, transportation costs could skyrocket. Any combination of external events can jack up or send coffee into a downward spiral. Keeping up with these events is critical to any coffee futures trading program, as is a profit target and clearly defined entrance and exit strategies.

Coffee Exchanges and Contracts

Two leading venues for coffee trading are the New York Mercantile Exchange (NYMEX), which is part of the Chicago Mercantile Exchange (CME) Group, and the Intercontinental Exchange (ICE). A standardized NYMEX coffee futures contract is quoted in U.S. dollars per pound and represents 37,500 pounds of Arabica coffee. Contracts are listed 23 months in advance for the months of March, May, July, September and December. ICE contracts specify exchange-gradegreen coffee beans from one of 19 countries of origin, with the prospect of physical delivery to ports in the U.S. and Europe. ICE coffee contracts are priced in cents and hundredths of a cent for the same months as NYMEX contracts.

Opening an Account

To trade coffee futures on NYMEX, you will have to post a certain amount for margin -- the good faith deposit that is required to trade futures products. As an example, as of July 2013, margin for NYMEX coffee futures is around $5,000 per contract, which represents just a fraction of the total value of the coffee contract. You can trade coffee futures through your broker or trade them online through the CME Group's electronic trading platform, CME Globex. The latter will require an approved trading application and a relationship with a CME clearing firm.

Trading Techniques

You could be a coffee insider or just an observer who is watching for the best time to capitalize on coffee price movements. Either way, coffee futures could be useful to you. If you think the price of coffee will go up, you'd buy, or "go long" a coffee futures contract; if you're bearish on coffee, you'd "go short," or sell the coffee future contract. Let's say you buy an ICE coffee futures contract when it is trading at 215.70 cents per pound. If the price goes up to 218 cents per pound, you could sell the contract for a profit, or 2.3 cents per pound multiplied by $18.75 per 0.05 cent in price movement, thus pocketing $862.50.

Coffee ETFs

If you don't have the patience or constitution to trade coffee futures yourself, there are exchange-traded funds to do the footwork for you. There are ETF's devoted solely to coffee, such as iPath Dow Jones-UBS Coffee ETN (JO), as well as others that include coffee as part of a diversified set of holdings, such as iPath Dow Jones-UBS Softs Total Return Sub-IndexSM ETN (JJS), with about 39 percent coffee in the investment mix. ELEMENTS Rogers Intl Commodity ETN (RJI) has only 2 percent invested in coffee.


About the Author

Timothea Xi has been writing business and finance articles since 2013. She has worked as an alternative investment adviser in Miami, specializing in managed futures. Xi has also worked as a stockbroker in New York City.

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