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Coffee Futures and Options Education
Coffee futures and options quick facts:
The History of Coffee and Coffee Futures
Arabica Trading
Coffee's beginnings are lost somewhere in
mankind's ancient history, but it is believed to have
originated in the Ethiopia around 3 A.D., where ground beans
were used to season food by the various inhabitants of that
area. In about 1300 A.D., the Southern Arabians first
roasted and brewed coffee for use as a beverage. The Middle
Eastern hub of the valuable trading routes to Asia and later
Africa efficiently dispersed the new valuable source of
commerce to European consumers. Today, coffee is one of the
world's most popular drinks and is among the world's most
important internationally traded commodities, with a number
of economies largely dependent in its trade. Coffee has even
been found to have some health benefits such as helping to
stop the onset of Alzheimer's disease, minimizing diabetes
and blood thinning.
The
Coffee, Sugar and Cocoa Exchange (CSCE) was the premier
world market for the trading of
coffee futures,
sugar futures and cocoa futures and options, and since 1993,
an innovator in the trading of futures and options in dairy
products. The CSCE was located in the world trade center
before it was destroyed in the September 11 terror attacks.
Symbolic of the strength and stability of the futures
markets, coffee, cocoa and sugar futures contracts were
actively trading within one week of the destruction of the
exchange. Since then the CSCE has since merged to become
part of the New York Board of Trade (NYBOT) and merged again
with the Intercontinental Exchange (ICE).
Coffee Futures Economics
Coffee Supply
Coffee trees, or bushes, grow primarily
in subtropical climates. Coffee beans are the seeds of
cherry-sized berries which are the fruit of the coffee tree.
Coffee is primarily classified in two types - arabica and
robusta. Arabian coffees, which make up the bulk of world
production, are grown mainly in the tropical highlands of
the Western Hemisphere. Robusta coffees are produced largely
in the low, hot areas of Africa and Asia. Their flavors are
less mild than the arabica coffees.
South and Central America produce the
majority of coffee trade in world commerce. Brazil and
Colombia are the largest growers of arabica coffees. The top
two robusta producers are Vietnam and Indonesia. Seventy
countries produce coffee and 45 of those produce 97% of the
world production.
The supply of coffee is affected by
weather conditions, the health of the coffee trees, and
harvesting practices which in turn moves coffee futures
prices.
Coffee Demand
The demand for coffee is primarily
determined by its price, the price and availability of
substitute drinks and consumer's tastes. In periods of
normal price variations, the demand for coffee is price
inelastic. This means that when coffee futures prices rise,
people do not reduce their coffee consumption
proportionally, and when coffee futures prices fall,
consumer demand for coffee does not proportionally increase
to any great extent.
In the United States, over the last 30
years, per capita coffee consumption has declined
considerably and limited population growth has led total
consumption to even out over the past decade. Although high
coffee futures prices were primarily responsible for the
1976-77 cutback in per capita coffee consumption, some
studies attribute the longer-term decline mostly to changing
tastes and very little to price changes. There is some
evidence to suggest that changing American lifestyles have
enabled soft drinks to compete with coffee as a social
drink.
The Role of the Exchange
and Coffee Futures
The
(ICE) is the world's premier forum for
coffee futures
and coffee options trading.
As an exchange, the (ICE) does not
participate in coffee futures price determination. Rather,
it provides a visible, free-market setting where members can
conduct coffee futures and options transactions subject to
Exchange rules and regulations. Since all coffee futures and
options contracts are standardized (with delivery months and
locations, quantity and grade constant), only price is
negotiable. The exchange environment allows prices to reach
their natural levels - an important economic function known
as price discovery.
Market participants are comprised of two
main groups: hedgers and investors. Hedgers are primarily
commercial firms that trade coffee futures and options to
reduce their risk to unfavorable price movements in the
physical markets. Hedging with coffee futures allows firms
to lock in prices for future purchases or sales assisting in
business planning and smoothing operations. Coffee options
hedging provides the ability to manage risk in many
different market environments by paying premiums for price
protection or earning income through coffee option sales to
augment marketing opportunities. Traditionally, hedgers have
included coffee producers, importers and roasters.
Hedgers and investors are joined in the
market by floor traders - independent, professional traders
who trade for their own accounts. Floor traders add
liquidity to the market, increasing efficiency and
facilitating commercial hedging and individual investment
objectives.
Trading Coffee Futures
A coffee futures contract is a
standardized, binding agreement to make or take delivery of
a specified quantity and grade of a commodity at an
established point in the future at an agreed upon price. A
contract buyer is obligated to take delivery of coffee
according to contract terms at a specified date, while
sellers are obligated to make delivery. Buyers are
considered to be "long" and sellers "short" the coffee
futures contract.
The vast majority of coffee futures
contracts never result in actual making or taking delivery.
Instead, contract holders liquidate their positions by
executing offsetting transactions in the market. Longs sell
the contracts they bought and shorts buy their contracts
back, removing delivery obligations.
Margin
for Coffee Futures
Toward ensuring contract performance, the
Exchange requires that market participants make original and
variation margin payments. Original margins are "good faith
deposits" established to ensure that market participants
will meet their contractual financial obligations.
Leverage
A major attraction of coffee futures
trading for investors is leverage. Since futures
transactions do not require full advance payments for the
commodity (just the margin), the buyer of a coffee futures
contract which increases in value (or the seller of coffee
futures contract which decreases in value) can realize a
profit which can be substantial in relation to the
commitment of capital. Assume that an investor can purchase
coffee futures contracts (each representing 37,500 pounds of
coffee) with a $3,000 margin deposit. Thus, if the investor
bought one contract at 150.00 cents/pound ($56,250 worth of
coffee) and sold the contract when coffee reached 165.00
cents/pound, he would realize a profit of $5,625 (15.00
cents x 37,500 pounds = $5,625) - a 187.5% return on the
initial margin deposit, which is returned when the position
is liquidated.
That's leverage, and it can be a powerful
investment tool. Of course, leverage works both ways. If
coffee futures prices were to move opposite from the
anticipated direction, an investor could lose the entire
margin deposit and more.
Coffee Futures Contract
Calls for delivery of washed arabica
coffee produced in several Central and South American,
Asian, and African countries, or unwashed arabica coffee of
Ethiopia.
Trading
Units:
37,500lbs. (approximately 250 bags)
Trading
Hours:
8:30A.M. to 12:30P.M. New York Time (verify with exchange)
Price
Quotation:
Cents per pound
Delivery
Months:
March, May, July, September, December
Ticker
Symbol:
KC
Minimum
Fluctuation:
5/100 cent/pound, equivalent to $18.75 per contract.
Daily
Price Limits (from previous day's settlement price):
6.00 cents with variable limits effective under certain
conditions. No price limits on two nearby months.
Coffee Options Contract
Confers to buyer the right to buy (in the
case of a call) or sell (in the case of a put) one coffee
"C" futures contract.
Trading
Unit:
One coffee "C" futures contract
Trading
Hours:
9:15A.M. New York Time until the completion of the closing
period which shall commence at 12:30P.M. (verify with
exchange)
Price
Quotation:
Cents per pound
Contract
Months:
"Regular Options": March, May, July, September, December;
"Serial Options": January, February, April, June, August,
October, November
Ticker
Symbol:
KC
Minimum
Fluctuation:
1/100 cent/pound, equivalent to $3.75 per contract.
Daily
Price Limits:
None
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