How to Trade Coffee Futures Profitably in 2021

Here is what you need to know about one of the most traded commodity in the world.

Coffee is one of the most popular drinks in the world. In the past, it was more popular in Europe and United States. These days, many people in Asian countries have started to love the drink. This has led to a new rush to meet the demand of these people.

As a result, big coffee companies like Starbucks have expanded aggressively in Asian countries (The company has more than 3000 stores in China).

Meanwhile, small Chinese companies like Luckin Brands have seen significant growth. The company is worth more than $4 billion. Starbucks stock has risen significantly and is now worth more than $98 billion.

It has been a great time for coffee companies like Starbucks, Dunkin, and Luckin. However, the price of coffee beans has been declining.

The decline of Coffee Beans Price

The price has been trading in a bearish pattern since November 2016, when the price reached a high of $1.80 per pound. In 2011, the commodity was trading at $3.0625 per pound. This trend is shown on the chart below.

coffee trend performance

There are several reasons for this decline.

First, the coffee market has been going through increased oversupply. The main producer of the crop are Brazil and Vietnam. As Economics 101 states, increased oversupply leads to lower prices.

This oversupply has happened as the number of acreage in Brazil continue to increase. Unlike the crude oil industry, this market does not have a central organization like OPEC to regulate prices.

As such, countries produce as much as they can.

Another reason why prices have declined is the Brazilian Real. The currency has been on a downward trend against the US dollar as shown on the chart below. A depreciating real is usually negative to the price of coffee beans.

coffee bean price

Real-USD comparison

Currency correlations in trading

Four ways for a successful coffee trading

There are several ways to trade coffee profitably. First, you can trade beans themselves. These beans are listed in various futures exchange in London, United States, and Shanghai. As a result, they are offered by various online brokers (we have this too).

Second, you can trade coffee currencies. The most obvious of these is the Brazilian real, which you can find in most online brokers. However, since coffee is a minor part of the Brazilian vast economy, the reality is that it is usually a bit diluted.

Third, you can trade coffee exchange traded funds (ETFs). These are large funds that are created with focus on this market. Some of the good examples of these ETFs are iPath Dow Jones-UBS Coffee ETN and iPath Pure Beta Coffee ETN among others.

Finally, you can trade stocks of companies like Dunkin Brands, Starbucks, and Luckin Coffee.

To trade coffee well, you need to have the fundamental knowledge of the commodity. This means that you need to have a good understanding of the supply and demand dynamics of the crop.

As such, you need to know whether these countries are increasing or reducing production.

You also need to have knowledge on the weather conditions. Also, you need to have a good understanding of technical analysis. This is the practice of using indicators like moving averages, Relative Strength Index, and Stochastic Oscillator.

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