Coffee Trading Strategy (Backtest And Futures Example)
Last Updated on May 27, 2023
Trading commodity futures is one way to diversify your portfolio and explore investment avenues beyond traditional securities, and coffee futures are among the most actively traded soft commodities on the commodity exchanges. To trade coffee futures successfully, you need to have in-depth knowledge of the commodity, as well as a thoroughly researched trading strategy. So, what is your coffee futures trading strategy?
Coffee futures is a financial derivative contract that represents an agreement to receive or deliver the specified quantity of coffee on a future date, at a pre-agreed price. The contract is settled by the physical delivery of the specified quantity and quality of coffee. A coffee futures Trading strategy refers to the methodologies and techniques you can use to trade the contract profitably and would include technical and fundamental analyses of the coffee market.
In this post, we answer some questions about the Coffee futures strategy and we also provide you with a backtest.
What are Coffee futures?
Coffee or coffee beans refer to the seeds of the Coffea plant, which are used to produce coffee drinks — the dark-colored beverage that people consume for its stimulating effect. Coffee is a member of the soft commodities group, and its origin can be traced to Ethiopia. There are two popular varieties of coffee beans: Arabica and Robusta. Arabica represents about 70% of the world’s coffee production and is the one mostly traded on futures exchanges.
Coffee futures are financial derivative contracts that represent an agreement to receive or deliver the specified quantity of coffee on a future date, at a pre-agreed price. At contract expiry, the seller of the coffee futures contract delivers the specified quantity and quality of coffee to the buyer through the exchange. Traders who just want to speculate on the coffee price without getting involved in the delivery can close out their trades before expiry or roll over their contracts.
Nearly three-quarters (74%) of the world’s coffee beans come from just five countries: Brazil, Vietnam, Columbia, Indonesia, and Ethiopia. Coffee traders monitor events and weather conditions in those countries, especially Brazil — the largest producer.
What is a Coffee futures strategy?
A coffee futures strategy refers to the methodologies and techniques you can use to trade the contract profitably. This includes the technical and fundamental analyses for timing the coffee futures market, as well as the techniques for position sizing, risk management, and so on. To succeed in trading the coffee futures market, you will need a robust trading strategy that offers precise entry and exit signals.
Coffee futures strategy backtest
A backtest with strict trading rules, settings, statistics, and historical performance is coming soon.
What is the seasonality of Coffee futures?
In the financial markets, seasonality refers to the tendency of an asset’s price to move in a fairly predictable way during certain periods of the year. The periods here often refer to the months of the year. Over the years, coffee futures have been noted to perform better during the months of April, May, and December than during the months of June and September. See the chart below:
What moves the Coffee market — What affects the Coffee market the most?
Some of the factors that move the price of coffee include:
- Adverse weather conditions, especially in Brazil and other major producing nations can lead to reduced production and drive coffee prices up.
- Political instability in Brazil or Vietnam can drive prices up.
- Economic growth from emerging economies in Asia, Latin America, and Africa will increase the demand for coffee and push prices up.
- The more positive reports about the health benefits of coffee, the more the consumption, which will drive up prices.
How are Coffee futures traded?
Coffee futures contracts are traded on ICE Futures US and CME Group’s Globex platform.
On the ICE futures exchange, Coffee “C” Futures (with the trading symbol, KC) trades from 9:15 AM – 6:30 PM London Time every trading day. There is a pre-Open market from 1:00 AM and a post-Close market from 7:00 PM to 1:00 AM the next day. The contract series includes March, May, July, September, and December, and a contract size is 37,500 pounds of coffee beans. Settlement is by physical delivery, and the last trading day is 8 business days prior to the last business day of the delivery month.
On CME’s Globex electronic platform, the contract (KTH) can be traded Sundays to Fridays, from 5:00 p.m. to 4:00 p.m. CT the next day, with a one-hour break at the end of each day. One full coffee futures contract is worth 37,500 pounds of coffee beans. There are 23 monthly contracts listed in the Mar, May, Jul, Sep, and Dec cycles, and the contract is financially settled. Trading terminates on the 8th last business day of the contract month.
How do you start trading Coffee futures?
To trade the contract, you need a futures broker that will grant you access to the exchange where coffee futures contracts are traded. So, you have to register with a futures broker, such as TradeStation, and fund your account.
Alternatively, if you just want to speculate on price movements, you may trade the CFD of Coffee futures contracts via an online CFD broker, such as IG. With CFD, you can trade price fluctuations without having to worry about the rigors of asset delivery in direct futures trading or the issues of contract expiry.
What is Coffee trading at?
As of November 24, 2022, Coffee futures (KC) were trading at $162.75 on the ICE Futures US. On CME’s Globex platform, Coffee futures were trading at $1.6275 per pound.
As the price changes from time to time, what is quoted here may not be the price it would be trading when you are reading this post. To get the real-time price on the CME platform or from TradingView, click either of those links.
What’s Coffee futures hour?
On the ICE futures exchange, Coffee “C” Futures (KC) trades from 9:15 AM – 6:30 PM London Time every trading day, and there is a pre-Open market from 1:00 AM and a post-Close market from 7:00 PM to 1:00 AM the next day.
On the CME Globex electronic platform, Coffee futures (KTH) trades Sundays to Fridays, from 5:00 p.m. to 4:00 p.m. CT the next day. There is a 60-minute break before the start of the next trading day (4:00 p.m. – 5:00 p.m. CT) from Monday to Thursday.
Where can I find trading charts?
You can get the chart on any trading platform that offers chart services. If your platform does offer charts, you can subscribe to trading charts via a third-party platform, such as MultiCharts.
You can also use TradingView, which offers free access to charts of different instruments. But to connect to your broker, you have to subscribe to the Pro services. You can also access the chart from the CME platform.
What are the trading symbols for Coffee futures?
There are two main coffee futures contracts: Coffee C futures trades on ICE Futures US and has the trading symbol KC. The coffee futures that trade on CME’s Globex platform has the trading symbol KTH.
What is the specification for the Coffee futures contract?
One contract of coffee futures is worth 37,500 pounds on both CME and ICE exchanges. The price quotation is in US dollars and cents per pound. The minimum fluctuation is 0.0005 per pound = $18.75.
There are 23 monthly contracts listed in the Mar, May, Jul, Sep, and Dec cycles. While the contract is financially settled on the CME platform, settlement is by physical delivery on the ICE Future. The last trading day is 8 business days prior to the last business day of the delivery month.
Why should you start trading Coffee futures?
Trading coffee futures allows you to speculate on the day-to-day fluctuations in coffee prices. It also offers coffee farmers and producers the ability to hedge the risk of future market fluctuations on their businesses.
Coffee futures also provides the opportunity to use a different trading strategy, such as arbitrage trading between two different exchanges or platforms to profit from price discrepancies.
What is the contract size?
One contract of coffee futures is worth 37,500 pounds of coffee beans on both CME and ICE exchanges. The price of a pound of coffee as of writing is $1.6275. So, the USD worth of a full contract of coffee is 37,500 x $1.6275 = $61,031.25.
What is the tick size?
The tick size of one full contract of coffee futures is $18.75 per tick per contract.
What is the minimum price fluctuation for Coffee futures?
The minimum price fluctuation is 5/100 cents per pound, which is equivalent to $18.75 per contract.
Are there any ETFs?
Yes, there are two ETFs trading on US exchanges that track the performance of the coffee market:
- iPath Dow Jones-UBS Coffee Subindex Total Return ETN (JO): The fund offers exposure to coffee futures, making it one of the more targeted and obscure commodity ETPs available. It is the best way to play the coffee market. However, you should be aware that this ETN exposes you to credit risk, and follows a futures-based index that may lag behind a hypothetical return on spot coffee prices.
- iPath Pure Beta Coffee ETN (CAFE): This fund is designed to reflect the performance of the Barclays Capital Coffee Pure Beta Total Return Index. It has an expense ratio of 0.75% and only about $5 million in assets. Its lower average daily trading volume compared to JO implies that it offers less liquidity than JO.
What factors affect Coffee prices?
Factors that can affect coffee prices include weather conditions and political events in Brazil and other major producing nations, economic growth, and reports about the health benefits of coffee.
What is the all-time high for Coffee futures?
The all-time high for coffee futures is $339.86, which was reached in April 1977.
What are the biggest risks in trading Coffee futures?
When trading any type of futures, including commodity futures like coffee, the biggest risk comes from adverse price movement. But the losses get worse from the use of leverage that futures offer. Losses are calculated using the actual value of the contract size traded, even though you are trading with a smaller amount. For example, if you trade with a 20x leverage, a 1% negative movement results in a 20% loss in your account, and a 5% adverse price move would wipe out your account completely.
What is the settlement method?
It depends on the exchange you trade with. On the CME Globex platform, coffee futures (KTH) contracts are financially settled, but on ICE Futures US, the contracts are settled by physical delivery.
What is the settlement procedure?
There is the usual daily settlement, which is the same for both exchanges. For the final settlement, on Globex, CME Group staff determines the settlement of the expiring contract by following the regular daily settlement procedure.
On ICE, the exchange supervises the delivery and quality of the commodity. “A Notice of Certification is issued based on testing the grade of the beans and by cup testing for flavor. The Exchange uses certain coffees to establish the “basis”. Coffees judged better are at a premium; those judged inferior are at a discount.”
The last notice day is seven business days prior to the last business day of the delivery month. Delivery locations include exchange-licensed warehouses in the Ports of New York District, Virginia, New Orleans, Houston, Miami, Bremen/Hamburg, Antwerp, and Barcelona
What is the block minimum for Coffee futures?
What is the difference between Coffee futures and the CFD instrument for Coffee?
Coffee futures trade on regulated futures exchanges, while coffee CFDs are offered by online CFD brokers, whom you are at the mercy of. However, while futures have expiry dates and may involve the delivery of coffee beans, CFDs can be traded without such worries.
Which forex instrument is the same as Coffee futures
Coffee CFDs. They are offered by online brokers, such as IG.
What are some important dates for this market?
Some of the important dates include:
- 1938 when Nestle company invented freeze-dried coffee as a method for Brazil to keep its coffee surpluses, and from that, Nestle invents Nescafe
- 1946 when Achilles Gaggia perfects his espresso machine in Italy
- 1971 when Starbucks opens its first store in Seattle’s Pike Place public market
What is the highest price Coffee has ever been — its all-time high?
Historically, the highest price coffee has reached is $339.86, which happened in April 1977.
What is the lowest price Coffee has ever been — its all-time low?
The lowest price coffee has reached is $42.20, which happened in October 2001.