How to Get Into the Coffee Trading Market

Coffee is one of the most popular drinks in the entire world. It’s a safe bet that no matter where you go, there is likely to be people buying, selling and drinking coffee. It is available in finished form at thousands of coffee shops around the world, or as ground roast beans at almost every retail grocery store and mini-market you can name. 

The humble coffee bean is available in iterations ranging from specialty coffee to cold brew, which explains why the global coffee market is worth billions of dollars. Keep reading to find out how you can boost your portfolio with some smart trades in the coffee industry.

What is Coffee Trading?

Although not in the same category as gold or oil, the coffee bean is considered a soft commodity. Its global popularity means that coffee, or more specifically coffee futures, are traded all over the world.

In the coffee futures market, traders buy and sell contracts as part of speculative bets on the long-term value of their contracts. As is the case with all futures or commodities trading, the success or failure of a coffee contract depends on the accuracy of the trader’s predictions about the state of the market on the contract’s expiration date.

Overview of the Coffee Trading Market

According to some estimates, people around the world drink 2.25 billion cups of coffee every day, which explains why the global market is worth $100 billion annually. Coffee is grown in roughly 50 countries that have the tropical and subtropical climate necessary for the coffee bean to thrive.

One of the most unique aspects of the coffee bean trade is that the beans from each coffee-growing region have their own flavor and intensity. That means there is a wide range of coffee futures to trade. According to the World Atlas, the top five global producers of coffee beans are:

• Brazil: 2.65 million metric tons per year
• Vietnam: 1.62 million metric tons per year
• Colombia: 810,00 metric tons per year
• Indonesia: 660,000 metric tons per year
• Ethiopia: 384,000 metric tons per year

While the coffee production market is primarily composed of developing nations, the coffee buying market consists of some of the world’s most vibrant economies. This is why global coffee trading can be so profitable. The top consumers of coffee globally are:

• United States
• France
• Germany 
• Italy
• Japan

The diversity in coffee-producing nations and the places where it is consumed create lengthy supply chains and a market segmented into many different sections (types of coffee, supply chain, specialty market).

Types of Coffee Traded on the Global Market

Coffee may be grown in different countries all over the world, and each type of coffee will have its own individual flavor or appeal to drinkers. No matter where an individual coffee bean grows, the two main types of coffee traded on the global market are:

• Arabica: Arabica beans are viewed by coffee drinkers as having the most natural flavor, which also explains why it’s the more expensive or premium bean of the two varieties. Currently, Arabica beans sell for between $2.50 and $3.00 per kg, and most Arabica beans are from Colombia or Brazil. According to some estimates, Arabica beans make up between 60-70% of the global market. 
• Robusta: Robusta is known for being a hearty, resilient coffee bean that can grow in hotter climates. It typically has a higher caffeine content per bean but also a slightly more bitter flavor. It’s not viewed as premium in the same way the Arabica bean is and sells for between $1.50 and $2.00 per kg. The current Robusta trade accounts for about 30% of the global market, with much of it being grown in Vietnam. 

Current Trends in the Coffee Market

As is the case with any commodity or commonly traded item, the market has unique trends that factor into pushing its value upwards or downwards in a given trading cycle. Some examples of trends affecting the global coffee market include:

Growing Demand for Specialty Coffee

In much the same way that craft beers and spirits have become popular around the globe, the demand for specialty coffee is growing. As the palates of coffee drinkers become more sophisticated, consumers are increasingly looking for a unique experience that comes from specialty coffees. This emerging market is increasing in popularity and profitability for traders. 

Rise of Sustainably and Ethically Sourced Coffee

Much of the global expansion in the coffee market took place during colonialism. Unfortunately, this also means that a lot of coffee was produced by workers under severe working conditions and the growth was controlled by companies who had little concern about the environmental impact of large-scale coffee growth. That trend has changed, and now many coffee drinkers insist on coffee grown sustainably and through ethical sources that pay workers fairly and maintain positive working conditions. That translates to higher production costs and higher prices for end users. 

Impact of Emerging Coffee Trends

Coffee was originally served hot, but as its popularity has grown around the world, people’s preferred methods of consumption have begun to change. A perfect example of this is the emergence of cold-brew or single-origin coffees that consist of beans all from one place instead of a proprietary blend. This increased level of sophistication by coffee drinkers has created a new luxury market where single-origin or cold brew beans are highly sought after and potentially more lucrative than their less heralded counterparts.

Challenges Faced by the Coffee Market

The coffee industry is no different from other commodities in that it faces unique challenges, all of which pose a potential threat to long- and short-term profitability. Some of those challenges include:

• Climate change and its effect on coffee production: Much of the world’s coffee is grown in tropical or subtropical zones. However, the coffee bean still has an ideal temperature range, and a continued rise in global temperatures threatens coffee production. According to some estimates, global warming has the potential to cause a 54% reduction in the amount of land suitable for growing coffee beans by the year 2100. That is going to result in severe upward pressure on coffee prices. 
• Fluctuating prices and market volatility: The price of commodities does not generally follow a linear pattern, but rather it fluctuates depending on market trends. Coffee trading is no different, and the price of beans can rise or fall quickly because of different factors, such as climate, disease, shipping costs and demand. These big market moves can make coffee traders a lot of money or wipe them out within a matter of minutes.
• Issues related to fair trade and sustainability: As global consciousness has risen, so too has the demand for fair trade — coffee where the producers and growers are fairly compensated — and environmentally sustainable coffee. Both of these trends reflect a higher level of social awareness, but fair trade and sustainable coffee cost more. That translates to higher option prices for traders, and higher prices for consumers at the end of the supply chain. 

Opportunities in the Coffee Trading Market

The coffee industry has been around for a long time and has several big players, but that doesn’t mean that there is a lack of opportunities in the modern coffee trading market. Some of the potential opportunities include:

• Increasing popularity of coffee in emerging markets: Although many of the top coffee-consuming countries are in the first world, the appetite for coffee is global. Emerging markets with growing middle classes in countries like India are driving new demand for coffee.
• Expanding coffee consumption habits and new coffee trends: One of the most unique aspects of coffee is that it can be enjoyed in so many ways and has numerous different flavor profiles. Examples of this would be the entire cold-brew craze and the emergence of canned coffee products like espressos and lattes that are served cold. 
• Potential for vertical integration and diversification in the market: Coffee has the potential to be vertically integrated into a company’s operation. For example, a large coffee maker can purchase their own coffee plantations and grow their own brand that they sell directly to consumers and distribute to retail outlets. Coffee is one of the few commodities that offer this potential. 

5 Steps for How to Trade Coffee

Coffee trading has many of the same fundamentals and strategies that you would take trading other similar commodities. If you want to become a coffee trader, follow these steps:

Open a Trading Account

Find an online commodities or trading platform that you are comfortable using and follow their steps for opening an account. 

Choose Your Trading Strategy

Some investors who are bullish on coffee beans buy futures and go long, while others opt to take up short positions if they believe the coffee trading market will decline rapidly. If you don’t like picking individual positions, you could invest in exchange-traded funds (ETFs).

Decide the Type of Coffee You Want to Trade

You can trade Arabica or Robusta or both. You could opt to trade fair-trade or specialty roasts.

Stay up to Date With Global News

If you want to trade coffee, you must discipline yourself to follow the political and climate trends in coffee-producing nations. You need to stay abreast of the demand side of the market in coffee-consuming nations. Once you study these trends for long enough, you will gain experience on when to make your trades and what to buy.

Implement Risk Management

There is risk in commodities trading, and no trading strategy eliminates that risk. However, you can take steps to manage the risk involved with coffee trading. Be realistic about how much money you can afford to lose and diversify your coffee trading investments across several sectors. 

There is a Lot of Dough in Coffee Beans

Coffee is one of the world’s most popular beverages, and that doesn’t seem like a trend that will reverse itself anytime soon. Trading coffee can be a lucrative play for investors. However, just as you would with any commodity, you must carefully weigh the risks and the global outlook for your chosen commodity before making trades. 

Whether you are bullish or bearish in your trading strategy depends on your risk tolerance, investment goals and understanding of the market as a whole. The good news is you have no shortage of trading platforms or coffee-related stocks that you can invest in. If you make the right play, you could literally turn a hill of beans into a pile of cash.

Frequently Asked Questions