How To Trade Coffee Futures

Includes: CAFE, JJS, JO
by: CommodityHQ

By Michael Johnston

When it comes time to add coffee exposure to your portfolio, investors may be left with questions as to the best ways to achieve that goal. Trading coffee can be a very lucrative opportunity, as these futures offer strong intraday liquidity that comes attached with enticing volatility. But be warned, trading soft commodities like coffee is not for the faint of heart. Positions can be devastated on a moment’s notice and can create a major headache for traders. Those looking to wade into these waters should always have a profit objective in mind as well as a disciplined entrance and exit strategy. For those looking to make a play on coffee contracts, we detail how to trade futures on this soft commodity..

The Exchanges

First things first, those looking to invest in futures will need to decide which exchanges they would like to utilize. Below, we outline three of the most popular options in the world for trading coffee futures.

  • New York Mercantile Exchange: The NYMEX is one of the most popular destinations in the world for coffee traders. Coffee futures currently extend through early 2014 with trading being conducted in the months of March, May, July, September, and December. Each contract, which is quoted in U.S. dollars per pound, represents 37,500 pounds of the commodity with the product symbol KT. Like the other soft commodities on the NYMEX, coffee trading takes place on Sunday-Friday between the hours of 6:00 p.m. and 5:15 p.m (NYSE:CST), meaning that investors can make a play for approximately 23 hours every day (there is a 45 minute break period between each day) [see also The Ultimate Guide To Coffee Investing].
  • Intercontinental Exchange: The ICE is another big name for coffee traders as it offers similar contracts to the NYMEX. Trading under the symbol KC, the ICE’s coffee contract “prices physical delivery of exchange-gradegreen beans, from one of 19 countries of origin in a licensed warehouse to one of several ports in the U. S. and Europe, with stated premiums/discounts for ports and growths”. Contracts here are priced in cents and hundredths of a cent up to two decimal places with available months being March, May, July, September, and December.
  • Tokyo Grain Exchange: Known as the TGE, this exchange will offer investors an international spin on trading coffee futures. The contracts, which have been trading since mid-1998, are representative of 50 bags (3,450 kilograms) and are quoted in yen per bag. Contract months include January, March, May, July, September, and November [see also 50 Ways To Invest In Agriculture].

Common Coffee Trading Strategies

Coffee can be traded at any time during the year, but investors will want to keep a close eye on harvest seasons as well as general weather trends involving the world’s largest producers. Floods, droughts, and high temperatures (among many others) can be telling signs of how coffee prices will react in the coming months. While investing in futures contracts is the most direct method of obtaining exposure to this commodity, futures trading falls beyond the risk spectrum of many [see also Warning: Ignore Bill Gross’ Hard Money Prediction At Your Own Risk].

For those looking for an alternative way to play this commodity, there are three exchange-traded products that are specifically designed to help investors obtain exposure to this soft commodity. The Dow Jones-UBS Coffee ETN (NYSEARCA:JO) is the most popular option and has been around for roughly four years. The fund invests in front-month futures and has a strong daily volume of roughly 27,000. Investors can also use the Pure Beta Coffee ETN (NYSEARCA:CAFE) which employs a unique roll methodology designed to mitigate the impact of contango. Finally, those looking to make more of an indirect play can try the Dow Jones-UBS Softs Total Return Sub-Index ETN (NYSEARCA:JJS), which invests in futures contracts for coffee, cotton, and sugar.

Further Resources and Reading

For further reading on coffee and related topics, check out some of the links below.

Disclosure: No positions at time of writing.

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