Demystifying the Coffee Futures Market

Introduction

Coffee prices have reached one of the highest levels in history, driven by adverse weather conditions, rising production and logistics costs, and growing global demand.

For you, the producer, to make strategic decisions in a highly volatile and speculative environment, it is essential to have access to reliable and up-to-date information. Our goal is to provide clear and secure insights to help you better understand the coffee market.

This report serves as the starting point for our future analyses. At the same time, we want to hear from you! That's why we created a survey to understand your main concerns and needs, making our reports even more aligned with what truly matters to you.

Click here to access the survey.

Who is this report for?

This report is for you, coffee producer, who seeks to better understand the market to make more strategic and secure decisions.

Key Issues Analyzed

In this report, we aim to answer key questions that directly impact coffee commercialization. Our focus is on understanding how prices are formed and how producers can use this information to make better decisions.

Core Questions of This Report

• Why is tracking futures market prices essential for coffee producers?
• How does the futures market influence the physical export market?
• What are the expectations for the future of the coffee market?

Data Sources

To ensure well-founded analyses, we use the following references:

• Domestic physical market: Monthly average Arabica coffee prices obtained from CEPEA, one of Brazil's leading agricultural research institutions.
• Futures market: Prices of Arabica coffee futures contracts traded on ICE Futures US, the main global exchange for this commodity.

Important Note

This report is for informational purposes only and does not constitute investment advice. The analyses are based on data available at the time and may not reflect all variables influencing prices. Final decisions on coffee buying and selling should consider multiple factors and each producer's individual strategy.

Context

What is the Coffee Futures Market?

The coffee futures market allows different players (producers, roasters, exporters, investment funds, and speculators) to trade standardized contracts for future delivery. For producers and roasters, these contracts serve as protection against price fluctuations, while for investors and speculators, they represent profit opportunities based on market variations.

For example, a coffee producer can sell futures contracts today to secure a fixed selling price for the next harvest, protecting against unexpected price drops.

Currently, the main exchange for trading Arabica coffee futures contracts is ICE Futures US, based in New York. Robusta coffee, on the other hand, is traded on ICE Futures Europe, headquartered in London. These platforms establish the standards and rules for contract trading.

What is the Physical Coffee Market?

The physical coffee market is where actual coffee transactions take place, involving the physical delivery of the product. These transactions occur in various ways, including direct sales between producers and roasters, auctions, forward contracts, and exports.

In the physical market, prices vary based on coffee quality, location, processing type, and demand. In the futures market, however, contracts are standardized, reflecting price expectations based on global supply and demand. These dynamics create an interconnection between the physical and futures markets, though they operate differently.

What is the difference between Brazil's physical market and the US futures market?

What percentage of the futures market is converted into physical market sales?

Most futures market transactions do not result in the actual delivery of physical coffee. Only a small fraction of contracts reach expiration with product delivery.

• Only 2% to 5% of ICE futures contracts result in actual coffee delivery.
• The remaining 95% to 98% of contracts are settled before expiration without product exchange.

Why should a coffee producer always track futures market prices?

Although the futures market does not involve direct coffee trading with physical delivery, it plays a fundamental role in price formation in the physical market. Futures contracts directly influence coffee pricing, impact producers' financial planning, and affect the industry's competitiveness. For a coffee producer, tracking futures market prices is not just a matter of curiosity but an essential strategy for managing their business.