Coffee Ice Futures Contract
The Coffee C contract is considered the benchmark for Arabica coffee that is physically delivered to numerous regulated warehouses in both the United States and Europe. Coffee is the most widely consumed beverage in the world and futures contracts provide a way for speculators and commercials to lock in future prices. The contract requires that the sell deliver grade green beans with origins of 20 potential countries with specific premiums or discounts for different delivery ports and type.
The Intercontinental Exchange (ICE) Coffee C contract is priced in cents and hundredths of a cent, per pound up to two decimal places. Each contract requires the delivery of 37,500 pounds of Arabica beans. According to the ICE web site, deliverable origins come from “Mexico, Salvador, Guatemala, Costa Rica, Nicaragua, Kenya, Papua New Guinea, Panama, Tanzania, Uganda, Honduras, and Peru all at par, Colombia at 400 point premium, Burundi, Rwanda, Venezuela and India at 100 point discount, Dominican Republic and Ecuador at 400 point discount, and Brazil at 600 point discount”.
Additionally, delivery points are regulated warehouses in the Ports of New York District, Virginia, New Orleans, Houston, Miami, Bremen/Hamburg, Antwerp and Barcelona. The benchmark where prices are considered par of New York and Virginia. There are discounts at Bremen/Hamburg, Antwerp and Barcelona delivery points which are 1.25 cents per pound, while New Orleans, Miami and Houston delivery points are at a discount of 1.25 cents per pound up to and including the March 2019 expiry, and at a discount of 0.50 cents per pound for the May 2019 and later expiries.
The Coffee C Futures contract trades in cents and hundredth of cents with the minimum increment of 5-hundredth of a cent per pound or $18.50 per contract. The contract trades actively for delivery months March, May, July, September, December. The first notice day, of acceptance of deliver is seven business days prior to first business day of delivery month.
There are several factors that can determine a premium or discount to Arabica coffee delivered in New York or Virginia which is considered par. This includes the growth or origin of the coffee as well as the type. The ICE also states that a notice of certification is issued based on testing the grade of the beans and by cup testing for flavor. The exchange will then judge the coffee relative to the bench market and issue a basis. Coffees judged better will receive a premium and those coffee beans that are judged inferior will be priced at a discount.
How to Trade
The supply of coffee is generally the drive as demand has remain stable over the past decade. Traders generally monitor the harvest of coffee and the external factors that could generate a disruption in supply. Geopolitical events will occasionally drive market volatility, but the weather is a factor that drives prices on a day to day basis the same as other crop based commodities that can be traded like sugar, orange juice and corn.
The world coffee belt has many climate similarities. The National Oceanic Atmospheric Administration says that “Optimal coffee-growing conditions include cool to warm tropical climates, rich soils, and few pests or diseases”. These climates have a similar latitude, which begins in South American, encapsulates the middle of Africa, and continues to South East Asia.
While the weather is generally warm, rain can affect the annual harvests, especially if the weather is dryer and hotter than normal. Traders will tract the weather during the growing seasons to determine the quality and quantity of beans that will likely be produced.
Above those moderate temperatures in tropical areas will stun bean development and accelerate the ripening accelerate. Faster ripening degrades coffee bean quality.