Thursday, March 25, 2010

Coffee, for more than just drinking

Coffee Markets Spread Betting – 10 Key Facts

Author: Daniel Jones

If you are looking to spread bet on coffee then there are a few facts that you should note.

1)The two main types of coffee that are traded are Robusta and Arabica

a.Robusta is generally traded on the London International Financial Futures and Options Exchange (LIFFE)
b.Arabica is generally traded on the Intercontinental Exchange (ICE)

2)Arabica Facts

a.Arabica is also known as Coffea Arabica or Coffee “C” when referring to coffee futures
b.When Arabica coffee cherries ripen they fall to the ground and spoil
c.Arabica accounted for around 60% of world coffee production. Brazil and Colombia produce the majority of the world’s Arabica supply

3)Robusta Facts

a.Robusta is also known as Coffea canephora and Conillon
b.It is considered to be of a lower grade than Arabica. It has twice the caffeine and produces an inferior taste
c.The Robusta plant is easier to take care of and has lower production costs. When its coffee cherries ripen they remain on the plant
d.The Robusta plant is less susceptible to disease than Arabica
e.The Robusta plant can grow in areas where Arabica cannot
f.Robusta accounts for approximately 40% of global coffee production. Vietnam and Indonesia produce 50% of the world’s Robusta

4)According to the International Coffee Organisation (ICO), last year saw coffee production down 7% to 118,000 million bags

5)Coffee is measured in 60kg bags

6)As Anthony Grech of IG Index recently reported “It is also important to note that the production of both coffee types, as with any agricultural commodity, is primarily dependent on weather conditions, harvesting practices and disease. Therefore monitoring these variables, particularly in the major coffee producing countries, will provide an understanding of coffee supply and its intrinsic value, when compared with demand”

7)Key players in the market are Procter and Gamble, Kraft, Nestle and Sara Lee. Together this ‘Big Four’ buys most of the world’s raw coffee. Therefore monitoring the buying habits of these companies would help provide a better understanding of coffee demand. From a micro perspective, marketing and profit margins and also play an important role in driving demand

8)You can spread bet on both Arabica Coffee “C” and Robusta with spread betting companies like WorldSpreads and IG

9)Note that coffee is traded in US dollars. That means one of the biggest factors affecting the price is the exchange rate, just like Crude Oil and Gold. Because coffee is traded in US Dollars then, all things being equal, Coffee will tend to follows the dollar exchange rates. If the Dollar goes down against the Euro, the price of Coffee should go up and vice versa.

10)Finally, it is worth noting that demand for coffee is considered to be price inelastic. This means that when coffee prices increase, individuals do not proportionally reduce their coffee consumption, and when coffee prices decline, consumer demand for coffee does not proportionally rise to any great extent

Before you start trading coffee note that spread betting carries a high level of risk to your funds. You can lose more than you initially invest. It may not suit all investors. Only speculate with funds that you can afford to lose. Ensure you understand the risks and seek independent financial advice if and when necessary.

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About the Author

Based in the heart of London’s financial district, Daniel Jones is a professional commentator for some of the leading financial spread betting and spread trading websites.

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