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How to trade coffee futures contracts?

You can trade futures by opening a trading account with a trusted broker who handles futures trading. Starsupply Commodity Brokers, CME Globex, CME Clear Port and Etrade are some well known online platforms for trading futures.

Most brokerages will charge the National Futures Association fees, which is roughly around $0.02 per side, along with a commission (which can range from $0.025 to $3 and more, per contract per side). You will also have to pay an exchange fee, which will vary depending on the exchange and the specific contract you are trading. Be sure to look at the fine print and add up all the fees into your cost. 

Coffee is a popular commodity, consumed worldwide and has a huge global demand, yet coffee trading is accompanied by several risks affecting the underlying commodity.

Firstly, the bulk of the world’s Coffee is produced in relatively few countries, so any disruptions in these countries can cause futures prices to go haywire. One can’t discount geopolitical issues, since most of the production is concentrated in developing nations, where political situations can be volatile. Any change in trade relations (either embargoes or preferred trading partner status) between the U.S. and these countries can impact coffee prices.

Secondly, coffee displays extreme sensitivity to the weather, with untimely rain or prolonged dry weather damaging the beans. There are wild price swings in the futures market whenever coffee beans are damaged by extreme cold weather. In fact, many coffee traders are particularly wary of winter freezes in the coffee-producing regions of Brazil, which can damage coffee production significantly, given that Brazil is the world’s largest producer. Coffee futures traders therefore need to closely monitor the weather patterns of the world’s biggest producers, like Brazil.

Thirdly, coffee is transported over large distances, opening the commodity for risk from transporting disruptions. Coffee is also affected by oil prices: with a rise in oil prices, the cost of transporting coffee will also increase, thereby impacting the futures market as well.

There are also risks typical to financial trading. Coffee futures have a lot of leverage, which allows traders to control a large amount of the commodity for a small amount of investment. However, it also means that even a small, unfavorable change in the prices of coffee can drastically impact a traders’ entire equity.

Furthermore, coffee production tends to vary every year, based on the production cycle of the Arabica coffee trees. This means that coffee futures traders should not rely exclusively on past data for making future forecasts.

The good news is that Coffee demand is price inelastic— that is, people do not drop their coffee consumption even if there is a rise in the price of coffee. People’s need for coffee is largely independent of the price of the commodity.

While Coffee futures are accompanied by significant price risk, they offer traders a chance at substantial profits. To achieve positive returns, traders should be cautious of intra-day swings. They should monitor the market constantly and do research on factors like future weather patterns. Traders should also be disciplined in risk management, and cut losses quickly on losing trades, in order to truly profit from coffee futures.

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