Coffee Jul '23 (KCN23)
|Contract||Coffee C Arabica|
|Tick Size||0.05 cents per pound ($18.75 per contract)|
|Contract Size||37,500 pounds (approximately 250 bags)|
|Months||Mar, May, Jul, Sep, Dec (H, K, N, U, Z)|
|Trading Hours||3:15a.m. - 12:30p.m. (Settles 12:25p.m.) CST|
|Value of One Futures Unit||$375|
|Value of One Options Unit||$375|
|Last Trading Day||Eight business days prior to last business day of delivery month|
Coffee is one of the world's most important cash commodities. Coffee is the common name for any type of tree in the genus madder family. Coffee is a tropical evergreen shrub that has the potential to grow 100 feet tall. The coffee tree grows in tropical regions between the Tropics of Cancer and Capricorn in areas with abundant rainfall, year-round warm temperatures averaging about 70 degrees Fahrenheit, and no frost. In the U.S., the only places that produce any significant amount of coffee are Puerto Rico and Hawaii. The coffee plant will produce its first full crop of beans at about five years old and then be productive for about 15 years. The average coffee tree produces enough beans to make about 1 to 1 Â½ pound of roasted coffee per year. It takes approximately 4,000 handpicked green coffee beans to make a pound of coffee. Wine was the first drink made from the coffee tree using coffee cherries, honey, and water. In the 17th century, the first coffee house, also known as a "penny university" because of the price per cup, opened in London. The London Stock Exchange grew from one of these first coffee houses.
Coffee is generally classified into two types of beans: arabica and robusta. The most widely produced coffee is arabica, which makes up about 70 percent of total production. It grows mainly at high altitudes of 600 to 2,000 meters, with Brazil and Colombia being the largest producers. Arabic coffee is traded at the Intercontinental Exchange (ICE). The stronger of the two types is robusta. It is grown at lower altitudes, with the largest producers being Indonesia, West Africa, Brazil, and Vietnam. Robusta coffee is traded on the LIFFE exchange.
Ninety percent of the world coffee trade is in green (unroasted) coffee beans. Seasonal factors have a significant influence on the price of coffee. There is no extreme peak in world production at any one time of the year, although coffee consumption declines by 12 percent or more below the year's average in the warm summer months. Therefore, coffee imports and roasts both tend to decline in spring and summer and pick up again in fall and winter.
Meager prices for coffee can create serious long-term problems for coffee producers. When prices fall below production costs, there is little economic incentive to produce coffee, and coffee trees may be neglected or completely abandoned. When prices are low, producers cannot afford to hire the labor needed to maintain the trees and pick the crop at harvest. The result is that trees yield less due to reduced use of fertilizer and fewer employed coffee workers. One effect is a decline in the quality of the coffee that is produced. Higher quality Arabica coffee is often produced at higher altitudes, which entails higher costs. It is this coffee that is often abandoned. Although the pressure on producers can be severe, the market eventually comes back into balance as supply declines in response to low prices.
Coffee prices are subject to upward spikes in June, July, and August due to possible freeze scares in Brazil during the winter months in the Southern Hemisphere. The Brazilian coffee crop is harvested starting in May and extending for several weeks into the winter months in Brazil. A major freeze in Brazil occurs roughly every five years on average.
Coffee futures and options are traded at the ICE Futures U.S. and ICE Futures Europe exchanges, and the B3 Exchange (formerly BM&F/BOVESPA). Coffee futures are traded on the JSE Securities Exchange (JSE).
Prices - ICE Arabica coffee futures prices (Barchart.com symbol KC) posted their low for 2021 in January at 118.75 cents per pound. Prices then traded sideways to higher in Q1. The upside in arabica was limited in Q1 after the International Coffee Organization (ICO) in February projected a global 2020/21 coffee production would rise +1.9% yr/yr to 171.9 million bags with a global coffee surplus of 5.27 million bags, up from a 4.85 million bag surplus in 2019/20. Coffee prices then trended higher into Q3 and surged to a 7-year high in July of 215.20 cents per pound. Prices skyrocketed as Brazil coffee trees, already weakened by drought, were damaged by two frost events in less than a month. The outlook for future Brazil coffee output dimmed with the damage to Brazil's coffee trees since it takes about three years for coffee trees to become commercially productive. Conab, Brazil's crop agency, projected that Brazil's 2020/21 arabica coffee crop would plunge -37% yr/yr to 30.7 million bags, the lowest in 12 years. Coffee prices fell back briefly into August as supply concerns eased after ICO reported that global coffee exports Oct-Jun were up +2.5% yr/yr to 98.55 million bags. Coffee prices then trended higher into year-end on concern about future supplies. Coffee production fell in Colombia, the world's second-biggest arabica producer, after heavy rain damaged crops. ICO continued to cut its 2020/21 global coffee surplus estimate throughout the year. In October, ICO cut its coffee surplus estimate to 2.39 million bags, down sharply from a February estimate of 5.27 million bags. Coffee prices soared to a 10-year high in December of 250.35 cents per pound and finished 2021 up +76% yr/yr at 226.10 cents per pound.
Supply - World coffee production in the 2021/22 marketing year (July-June) is expected to fall -4.8% yr/yr to a 4-year low of167.474 million bags (1 bag equals 60 kilograms or 132.3 pounds). Coffee ending stocks in the 2021/22 marketing year are expected to fall -19.8% yr/yr to a 6-year low of 32.018 million bags. Brazil is the world's largest coffee producer by far with 33.6% of the world's supply followed by Vietnam with 18.6%
Demand - World consumption of green coffee in 2020/21 rose +0.5% yr/yr to 163.141 million bags.
Trade - World coffee exports in 2021/22 are forecasted to fall -by 3.5% yr/yr to 139.023 million bags, down from the 2020/21 record high of 144.115 million bags. The world's largest exporters of coffee in 2021/22 are expected to be Brazil with 23.9% of world exports, Vietnam with 20.8%, and Columbia with 10.1%. U.S. coffee imports in 2021 rose +3.2% yr/yr to 27.398 million bags, modestly below the 2019 record high of 29.216 million bags. The key countries from which the U.S. imported coffee in 2021 were Brazil with 29.3% of U.S. imports, Columbia with 18.6%, Guatemala with 5.4%, and Mexico with 5.3%.
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