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Coffee - Trading with commodities

  • Post category:Commodities
  • Reading time:10 mins read

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Trading has become much more important in recent years. Due to the excellent price development on the stock exchanges, many investors have been able to record good profits. Especially the trade with commodities and CFDs fascinates many people on the stock exchange. It does not have to be only classics such as gold or silver, with which one trades. An exciting commodity to trade is for example coffee. Why are coffee CFDs so exciting and how can profits be made with them?

What are the uses for coffee?

Coffee is known and popular as a plant and as a beverage almost all over the world. This is also the reason for the wide range of applications of the black bean:

Coffee as a drink

Especially in our latitudes, coffee is primarily used to prepare delicious drinks. At the same time, different countries have each developed their own "coffee culture". Italian cuisine in particular is very well known for this, with its numerous coffee variants.

Coffee as food

But coffee is just as much a pleasure to eat as it is to drink. In numerous recipes, coffee can be processed excellently, both in sweet foods such as cakes, as well as in savory variants.

Coffee as fertilizer

A popular household tip is to mix old coffee grounds into plant soil to use as fertilizer. It has been proven that there are some plants that can safely be fed nutrients from coffee grounds.

Coffee as a cleaning agent

Coffee has also found its way into the household as a cleaning agent. Coffee powder can efficiently bind negative odors.

Where does the coffee come from?

In all probability, the coffee plant originated in Ethiopia. It was not until the 16th century that the plant came to Europe via Turkey and thus began its triumphal march. Even today, Ethiopia is still considered an important coffee-growing country. But in the meantime, several other countries have overtaken Ethiopia as an exporter:

Brazil: cultivation country number 1

Brazil is the world's largest exporter of coffee. It is estimated that there are over 300,000 coffee farms throughout the country. The Arabica variety accounts for around 80 percent of total production. Incidentally, Brazilians consume about half of the harvested coffee themselves. Brazil is the world's largest coffee producer with a share of around 40%.

Vietnam: Underestimated coffee country

The fact that the Asian country is already the world's second largest exporter of coffee is perhaps surprising at first. After all, it accounts for around 16% of the global harvest. However, the country has specialized in the cultivation of the Robusta variety, which is not consumed as frequently as Arabica. The exported coffee from Vietnam is therefore often processed into other products, such as instant coffee.

Indonesia and Colombia are also major coffee exporters. The country of origin, Ethiopia, actually only comes in fifth place.

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What influences the price of coffee?

There are plenty of factors that have an influence on the price of coffee - and not all of them have anything directly to do with the black bean. First and foremost, of course, it is the supply and demand factors that determine the price.

Germany is the world's second-largest importer of coffee after the USA. Rising prices are therefore particularly noticeable here. Supply depends above all on crop yields. Climatic changes in particular can lead to crop failures time and again. The resulting supply deficit is offset by higher prices.

However, other factors such as taxes or currency fluctuations also have an influence on the final coffee price. 

Currency fluctuations, especially of the Brazilian real or the Vietnamese dong, can also cause prices in the store around the corner to change, sometimes significantly. Fair trade coffee is an attempt to balance out these price fluctuations and ensure a stable price level.

Is there a seasonal influence on coffee prices?

The cultivation of coffee in different regions of the world also has some seasonal effects. For example, as already mentioned, the majority of coffee beans are grown in countries such as Brazil or Vietnam. The Arabica variety in particular plays a significant role in price formation, as it accounts for the majority of global production.

Since the harvest in these countries takes place at the beginning of the European summer, there is a seasonal trend to be observed, especially in May. Until then, prices often rise slowly but steadily. In the following months, prices fall due to the harvest that has taken place. Around August, coffee prices reach a low point. This is due to the many coffee roasting companies that build up large stocks as processors. These are intended to ensure consumption in the coming winter months.

Forecast: How will the price of coffee develop until 2025?

The price of coffee has risen sharply, especially since 2020. The reason for this was a massive drought in Brazil. A weak harvest is also on the horizon for this year in Brazil, as there is simply not enough rain.

Experts expect this problem to persist over the next few years. As a result, the price of coffee beans, especially of the Arabica variety, is likely to rise significantly over the next few years. It will therefore be important to monitor current developments in the coming years, especially with regard to the situation in Brazil.

If, contrary to expectations, the situation recovers in the short term, or if other countries massively increase their production of coffee, this could lead to a recovery in the price of coffee.

Another important price factor could be China. The country, originally known as a tea nation, is increasingly discovering a love of coffee. With China, demand is also likely to rise steadily in the coming years. If crop failures are added to the mix, the price-driving effects are likely to be intensified.

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Risk note Plus500: 79% of CFD retail investor accounts lose money.

How to trade coffee?

You can invest in coffee in various ways. On the one hand, you can buy shares in companies that have a lot to do with coffee themselves, including food companies. In general, it is more difficult for private investors to trade coffee directly. Unlike the precious metals gold and silver or oil, there are fewer certificates and warrants.

Another, very modern variant to trade with commodities are CFDs. The advantage of CFD trading lies in the leverage effect: Thus, the possible profit (but also the possible loss) can be increased many times over with a small capital investment.

With a leverage of 10, for example, the CFD investment rises or falls 10 times as much as the underlying commodity. The trading hours for CFDs are mostly between 7:30 in the morning and 22:30 in the evening, sometimes CFD trading is also possible on weekends.

What are the most exciting coffee stocks?

Some companies involved in the production and processing of coffee are known worldwide. These will be briefly mentioned below:

Starbucks

Starbucks is an internationally successful coffee producer. The brand is best known for the coffee houses of the same name. Here, primarily beverages (first and foremost coffee) are offered, as well as other food products. Since the company operates worldwide, it is unlikely that business will collapse everywhere in the world at the same time. Moreover, coffee houses can pass on rising prices to customers. Therefore, Starbucks is an exciting coffee-related company that has long-term opportunities in the stock market.

Nestlé

The food company Nestlé comes from Switzerland and is considered a true food giant. Not only in terms of coffee, this company has made a name for itself worldwide with the production and distribution of food products of various kinds. As for coffee, Nestlé has launched its own product line with the brand "Nescafé", which includes various goods.

This includes instant products as well as coffee beans and our own coffee machines with pods. Nestlé has a very broad product range and is active worldwide. Therefore, it is unlikely that this company will incur massive losses everywhere in the world at the same time. Therefore, this share is a solid value with which you can't go wrong in your portfolio.

Advantages of CFD trading with coffee

CFD trading offers some advantages over the classic investment in shares. Thus, CFDs can be speculated with relatively little capital. 

Another advantage of CFDs are the often low costs and high transparency. Investors who want to trade commodities know at any time what costs you will incur when opening and closing their position. In addition, CFDs are usually cheaper than trading stocks or leverage certificates on the stock exchange. The high selection of possible underlyings for trading also speaks in favor of CFDs.

Another advantage of CFDs is that a coffee CFD, can be speculated on both rising and falling prices. In addition, the long trading hours play a role for many investors. Thus, at almost any time the market can be followed and an investment can be made. With a little practice, you can even manage to trade commodities successfully within a few minutes.

Conclusion

CFD trading offers many advantages - also for investors who would like to invest in coffee. Although some things have to be taken into account when trading CFDs, good profits can also be made with this investment strategy. Ultimately, however, there is also the risk of total loss of an investment, of which one should be aware. However, the better an investor becomes familiar with the specifics of the market in CFDs and also with the coffee market, the better one can minimize this risk.

Risk note Plus500: 79% of CFD retail investor accounts lose money.

Plus500 risk note: CFD are complex instruments and come with the high risk of losing money quickly because of the leverage effect. 79% of retail investor accounts lose money trading CFDs with this provider. You should consider whether you understand how CFD work and whether you can afford to take the high risk of losing your money.