We drink it every day; we love the flavor in various foods and beverages, we use it to wake up in the morning and we “grab” a cup for meetings. Coffee also known as Coffea, is one of the largest commodity markets in the world, but what do we really know about it?
It is believed coffee plants originated in the Ethiopian province of Kaffa. By the 15th century, via the port of Mocha, coffee was cultivated in Yemen. By the late 1600’s coffee was discovered by consumers around the world with the Dutch often given credit for introducing the product to various countries.
By the 1830’s Brazil became the largest producer of coffee. In the early 1900’s Colombia became a global producer. The opening of the Panama Canal was influential to Colombia’s exporting. According to the Commodity Research Bureau Yearbook, Puerto Rico and Hawaii are the only two areas of the U.S. for sizeable coffee production.
It is a slow production cycle as the coffee plant will not produce the first full coffee bean crop until it is five-years old. After 15 or 20 years the plant loses productivity. In an average year, a coffee plant produces enough beans to make an estimated 1 ½ pounds of roasted coffee. Interesting to note, wine was the first known drink made from coffee cherries, honey and water.[i]
In some less developed countries, coffee exports may account for more than 50% of the country’s foreign exchange earnings. Many coffee producing countries consider coffee second in value only to crude oil as a source for foreign exchange.[ii]
A few historical notes; the Boston Tea Party was planned in a coffeehouse, the NYSE, the Bank of New York and London Stock Exchange began in coffeehouses.
In 1882 coffee futures began trading on the New York Cocoa Exchange. Later part of the New York Board of Trade and acquired by the Intercontinental Exchange (ICE) in 2007. Arabica coffee futures are traded in NY and at the Brazilian BM&F Bovespa. Robusta contracts are traded at the NYSE-LIFFE London exchange. Spreading strategies of the contracts are common between these exchanges.[iii]
Coffee, similar to other commodity markets is a mean-reverting market. It tends to rally to quick spikes of high prices and then gradually falls back to an average or equilibrium price. 2014 started the year with a jolt. As of February 27, 2014 Coffee rallied 58.81% in 2014.[iv]
In the second part of the article we will drill deeper into the fundamentals of coffee.
Copyright ©2014 Mark Shore. Contact the author for permission for republication at [email protected]
Past performance is not necessarily indicative of future results. There is risk of loss when investing in futures and options. Futures can be a volatile and risky investment; only use appropriate risk capital; this investment is not for everyone. The opinions expressed are solely those of the author and are only for educational purposes. Please talk to your financial advisor before making any investment decisions.