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How to trade coffee in Singapore

3 ways to jolt your portfolio with this ubiquitous — though volatile — commodity.

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Coffee is the second-most-traded commodity in the world after crude oil, with an industry worth over $100 billion worldwide. Integrated into our daily routines, it’s a staple on countless street corners — and global demand has increased considerably in recent years. But it can be a complex, nuanced and volatile commodity.

To maximise your returns, you’ll need to conduct through research and understand the inherent investment risks associated with your daily bean. Learn more in this guide.

Types of coffee beans

When trading coffee, it is important to consider the two main types of coffee beans: Robusta and Arabica. Both variants are traded in options and futures contracts on the Intercontinental Exchange (ICE).

Here’s an overview of their features and how they differ:

Arabica

  • Flourish at high altitudes and cooler climates – predominately grown in Brazil, followed by Columbia
  • Make up about 60 to 70% of global coffee production
  • Prized for its superior quality, as well as its aromatic and balanced flavour
  • More stable pricing

Robusta

  • Thrive in lower altitudes and warmer climates – mostly grown in Vietnam
  • Make up about 30% of global coffee production
  • Features an earthy and bitter flavour
  • Higher caffeine content
  • More volatile pricing

Ways to invest in coffee

There are several ways you can trade the commodity:

1. Buy coffee ETFs

Coffee exchange-traded funds (ETF) provide the option of trading in coffee beans – the commodity. ETFs are the lowest risk option for investing in coffee. The leading coffee ETFs are actually ETNs. Both ETFs and ETNs trade like stocks on an exchange. An ETF represents an underlying equity security whereas an ETN is a senior debt note, similar to a bond.

Exchange-traded funds (ETFs) are a type of investment made up of a collection of commodities, equities, bonds or currencies, allowing for diversification across an entire industry by tracking its overall success.

Commodity-based coffee ETFs operate with an arbitrage mechanism designed to allow investors to directly track the performance of the coffee market as a whole.

Only one ETF that is exclusively invested in coffee is currently available:

  • iPath Dow Jones-UBS Coffee Subindex Total Return ETN (JO), which tracks an index of futures contracts on the price of coffee.

Pros

  • Instant diversification across the coffee industry.
  • Investments come at a low price, with lower risk than stocks in a single company.
  • Single transaction adds an entire market to a portfolio.
  • Simple, low-maintenance way to invest.

Cons

  • The collection is decided for you, meaning you relinquish some of your control.
  • Though diverse, ETFs are not immune to volatility.

2. Buy stocks in coffee companies

Another option for investing in the coffee industry is purchasing stock in a company that sells or is involved in the production of this commodity, though coffee growers and importers are much more fragmented than some other commodities. Investing in more than one company is a safer option than putting all your eggs in one basket. Another way to reduce your risk is by buying stock in a company that sells coffee in addition to other products. In the case of coffee, the industry leaders for coffee sales include ubiquitous brands like:

  • Starbucks (SBUX)
  • Dunkin Brands (DNKN)
  • McDonald’s (MCD)
  • J.M. Smucker’s (SJM)
  • Nestle (NSRGY)
  • Kraft (KHC)
  • Procter & Gamble (PG)

Shares or stock are a simple way to access the market, because you can purchase them through an online broker or financial adviser.

Pros

  • Build and tailor your own portfolio.
  • Simple and accessible investing.

Cons

  • Unpredictable growing and manufacturing factors make for volatile stocks and prices.
  • Risk of losing your investment can be high.

3. Purchase coffee futures

Futures are one of the most direct ways to trade a commodity, offering high liquidity and volatility. When you purchase a future, you buy a contract to purchase a commodity — in this case coffee — at a future date at a specified price. These contracts come with an expiration date.

Investing in coffee futures essentially means betting on what the coffee will sell for at a specific date and place. For instance, the Coffee C contract offers trades five times a year and covers bean deliveries from 19 countries. Each contract is for 37,000 pounds of coffee — not a small investment. Those who grow coffee beans or buy coffee beans can use futures to lock in prices, but futures can also be traded by investors and speculators.

Futures can be extremely volatile and are far riskier than other investment options. They also offer the greatest potential return if you get the timing and price movement right to see a profit on your investment. They’re also traded on different exchanges from stock, so you’ll need a brokerage account that supports futures trading and you’ll probably access a different part of your trading platform than you would with stocks or options.

Pros

  • Because of lot size, small price moves of as little as 1% can mean strong gains.
  • Investing is simple and accessible.

Cons

  • Futures are volatile — you can’t predict with certainty how prices will fluctuate.
  • Risk of losing your investment is high, as small moves against you can spell big losses.
  • Failure to exercise futures prior to expiration renders them worthless.

What are the risks of investing in coffee?

The price of coffee fluctuates depending on a range of factors, many of which are out of our control, resulting in a volatile and unpredictable commodity:

  • Weather conditions. As coffee is a climate-sensitive perennial crop, its yield numbers can be drastically affected by prolonged periods of excessive moisture or dry weather. Based on historical price trends, coffee display the largest price shift whenever extreme cold weather hits the growing region of Brazil or other main producers.
  • Economic and political instability. If any coffee-producing countries experiences economic and political instability, coffee production may also be affected, resulting in scarcity and soaring prices.
  • Fluctuations in FX rates. An inverse relationship typically exist between the value of the dollar and commodity prices.
  • Changes in trade regulations and restrictions. Policy changes such as tariffs and export control can all affect commodity prices.
  • Changes in the supply and demand. Price volatility stems from supply and demand. If the coffee supply dips more than the demand for it, you can expect a significant price increase.
  • Consumer demands. Europe and the US are the largest consumer of coffee. China and some South American countries are also becoming more accustomed to coffee and may result in a significant increase in demand.
Disclaimer: The value of any investment can go up or down depending on news, trends and market conditions. We are not investment advisers, so do your own due diligence to understand the risks before you invest.

Bottom line

You can invest in coffee by purchasing coffee ETFs, stock in coffee companies or coffee futures. But the price of your daily bean can be unpredictable given growing and manufacturing variables.

Frequently asked questions

Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading CFDs and forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades.

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