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Why Buy Cash Coffee | Trading advice

Trading Cash Coffee | Commodies

Coffee is one of the world’s most important cash commodities and is second in value only to crude oil. Coffee is the common name for any type of tree in the genus madder family. It is actually a tropical evergreen shrub that has the potential to grow 100 feet tall. The coffee tree grows in tropical regions between the Tropics of Cancer and Capricorn in areas with abundant rainfall, year-round warm temperatures averaging about 70 degrees Fahrenheit, and with no frost. The coffee plant will produce its first full crop of beans at about 5 years old and then be productive for about 15 years. The average coffee tree produces enough beans to make about 1 to 1 ½ pounds of roasted coffee per year. It takes approximately 4,000 handpicked green coffee beans to make a pound of coffee. Actually, wine was the first drink made from the coffee tree using the coffee cherries, honey, and water. In the 17th century, the first coffee house, also known as a “penny university” because of the price per cup, opened in London. The London Stock Exchange grew from one of these first coffee houses.

Coffee is generally classified into two types of beans – arabica and robusta. The most widely produced coffee is arabica, which makes up about 70 percent of total production. It grows mostly at high altitudes of 600 to 2,000 meters, with Brazil and Colombia being the largest producers. Arabic coffee is traded on the New York Board of Trade. The stronger of the two types is robusta. It is grown at lower altitudes with the largest producers being Indonesia, West Africa, Brazil, and Vietnam. Robusta coffee is traded on the LIFFE exchange.

Ninety percent of the world coffee trade is in green (unroasted) coffee beans. Seasonal factors have a significant influence on the price of coffee. There is no extreme peak in world production at any one time of the year, although coffee consumption declines by 12 percent or more below the year’s average in the warm summer months. Therefore, coffee imports and roasts both tend to decline in spring and summer and pick up again in fall and winter.

Coffee futures are traded on the Bolsa de Mercadorias & Futuros (BM&F), the Tokyo Grain Exchange (TGE), the London International Financial Futures and Options Exchange (LIFFE), and the CSCE Division of the New York Board of Trade (NYBOT). Options are traded on the BM&F, the LIFFE and the CSCE.

The very low prices for coffee seen in the past several years have created serious problems for coffee producers. When prices fall below the costs of production, there is little or no economic incentive to produce coffee. The result is that coffee trees are neglected or completely abandoned. When prices are low, producers cannot afford to hire the labor needed to maintain the trees and pick the crop at harvest. The result is that trees yield less due to reduced use of fertilizer and fewer employed coffee workers. One effect is a decline in the quality of the coffee that is produced. Higher quality Arabica coffee is often produced at higher altitudes, which entails higher costs. It is this coffee that is often abandoned. Although the pressure on producers is severe, the market should eventually come back into balance as supply falls to meet demand, thus boosting prices. In fact, Brazil’s 2003/4 crop was sharply lower, in part, because of poor yields caused by the neglect of groves during the long period of weak prices.

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