Coffee Financial Markets

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Coffee-Financial Markets

1. Introduction

One of the most prominent beverages and important commodities in our days is coffee. There have been many stories and legends on how was the coffee introduced in our society. However, the earliest credible evidence of the coffee drinking, appears during the 15th century in the written accounts of Ahmed al Ghaffar in Yemen. From Yemen coffee was introduced, firstly, in the rest of the Middle East, Persia, Turkey and northern Africa. From there coffee was traded in Italy and it spread to Europe and the rest of the world.

Coffee is a soft commodity. This term refers to commodities that are cultivated and grown, instead of being mined. One can trade various types of coffee, which makes coffee trading different to many other commodities, especially the hard commodities. There are two main varieties of coffee beans being traded worldwide, Arabica and Robusta. Robusta beans are sold approximately on 70% of the price of Arabica beans, and therefore they are more commonly traded by big coffee trading companies, such as Nestlé, Procter& Gamble, Sara Lee and Kraft. In recent years, the price disparity of these two has been decreased, which can be explained by the decision of the big companies to start purchasing more Robusta beans, something that decreased the demand for Arabica beans variety.

Approximately 70 countries produce coffee, with the vast majority of the supply coming from the developing countries like Brazil, Colombia, Vietnam, Ethiopia and Indonesia. However, only Brazil and Colombia are included in the countries with the highest coffee exports (by value) in 2016 followed by Switzerland, the United States of America and Peru. On the other hand, the countries with the highest coffee imports in 2016 are the United States of America, France, Japan, Canada and The United Kingdom.

In this paper, we firstly describe and explain the financial market of coffee, the instruments traded and its specifications. Then we discuss the evolution of the coffee price in the financial markets over the years and try to analyse the same using different mathematical methods. Furthermore, the factors affecting the price of coffee will be introduced and discussed. Additionally, we also illustrate the connection and the dominance that Switzerland possesses in the coffee trading which is followed by the conclusion.

2.Coffee and Financial Markets

2.1 Coffee futures and options exchanges

Financial markets or exchanges plays a pivotal role in keeping the coffee markets organized by providing facilities for trading and regulating by making and monitoring rules for trading. It helps in price discovery and risk transfer. Out of the various exchanges that trades futures and options contract, the two exchanges servicing majority of the coffee securities trades are Intercontinental Exchange (ICE) in New York and London International Financial Futures and Options Exchange (NYSE Liffe) in London. While ICE trades New York C Futures Contract of Arabica coffee (market symbol KC), NYSE Liffe trades Robusta coffee (market symbol RC). These markets are normally referred to as New York Arabica and as London Robusta respectively. Other exchanges that trade in similar securities are found in Brazil, Tokyo, Singapore and Vietnam.