Walk down any street, and chances are you’ll see people strolling about holding cups of coffee. The beans producing this delicious brew only grow in temperate climates, which make the crop very vulnerable to cold weather. A frost rumor in Brazil before the harvest begins can cause prices to skyrocket, so coffee can be a very volatile commodity. However, traders can determine how much risk they want to take on by trading either coffee beans, coffee exchange traded funds or stock shares.
Traders can actively invest in coffee beans, coffee ETFs and general stock shares, depending on their preferences.
Trade Futures for Higher Risk
Use coffee futures to trade the physical commodity. Coffee is traded on the New York Board of Trade, which is run by ICE (Intercontinental Exchange). One coffee futures contract controls 37,500 pounds of coffee. The initial margin required to trade one coffee futures contract is $4,900, and you must keep $3,500 as a maintenance margin per contract. Coffee is quoted in 5/100 cents per pound, making a 1 cent change in price equal to $375.00. Weather conditions, political turmoil, and changes in supply and demand help make coffee futures volatile, so only trade futures if you have a taste for risk.
Trade ETFs for Less Risk
Lower the risk of investing in coffee by trading exchange traded funds (ETFs). Although there are many coffee ETFs available, only two are 100 percent invested in coffee. The iPath Dow Jones-UBS Subindex Total Returns, known as JO, tracks only one futures contract at a time. Because futures contracts expire monthly, JO rolls the expiring contract into the next month’s contract. iPath Pure Beta Coffee, or Café, has developed a proprietary method for rolling expiring contracts into forward months. Consider the advantages and disadvantages of trading either ETF before investing.
Invest in Coffee Product Companies
Buying a double latte at Starbucks increases your wealth if you own the stock. You can get a pure coffee play by investing in Starbucks, Green Mountain Roasters and similar companies. Conglomerates such as Kraft, Sara Lee, Procter and Gamble, and Nestle sell coffee to consumers in addition to other products. Use your stock screener to compare each company before selecting a particular one to trade.
Open an Online Trading Account
Decide how you would like to trade coffee. Go online and use your trading account to open a position in a stock or ETF. Contact your futures broker to place the trade so you get the best price. After the trade is entered, check your positions screen to be sure your coffee trade is included in your portfolio.
Coffee futures are highly leveraged and volatile investments, and prices can rise and fall dramatically. Never trade with money you can’t afford to lose.
- Traders can use coffee’s growing cycle to help determine trade entry and exit points.
- Coffee futures are highly leveraged and volatile investments, and prices can dramatically rise and fall. Never trade with money you can’t afford to lose.
Based in St. Petersburg, Fla., Karen Rogers covers the financial markets for several online publications. She received a bachelor's degree in business administration from the University of South Florida.