Next to oil, no, it’s not gold, I’m sorry, but coffee is the second most traded commodity in the market. Originally cultivated in the hills of Ethiopia, coffee has been revered as the beverage of the gods and has been traded in different markets for thousands of years.
Coffee, in the modern market is traded through the futures contract, we’ll be discussing futures contract, of course, in the near future as part of our livestream at Soul Of The Market.
An example of a coffee commodity futures contract.
|Coffee Contract Specifications|
|Ticker Symbol||Open Outcry: KC (ICE)
Electronic: EKC (ICE)
|Contract Size||37,500 pounds|
|Deliverable Grades||Arabica Coffee: A Notice of Certification is issued based on testing the grade of the beans and by cup testing for flavor. The exchange uses certain coffees to establish the “basis.” Coffees judged superior are at a premium; those judged inferior are discounted.|
|Contract Months||March, May, July, Sept, Dec|
|Trading Hours||Intercontinental Exchange (ICE): Monday-Friday 1:30am-3:15pm EST|
|Last Trading Day||One business day prior to last notice day|
|Last Notice Day||Seven business days prior to the last business day of the delivery month|
|Price Quote||Cents and hundredths of a cent up to two decimal places|
|Tick Size||.05 cent/pound = $18.75 per contract|
|Daily Price Limit
(Not applicable in electronic markets)
If you try to buy or sell a coffee contract you’ll see something like this
This means that “Coffee” (KC) July (N) 2016 (6) is currently priced at $1.1925/pound because future commodities such as coffee, sugar, orange juice are quoted in cents per pound. In this case a trader $119.25 is equal to $1,192.50 per pound, so how can you afford that? We’ll discuss later on the subject about margins. The value of the commodity contract is always based on the current price of the market multiplied by the actual value of the contract itself. In this instance, the contract size is 37,5000 pounds
$1.1925 x 37,500 = $44,718.75
How can a retail investor from an emerging market like the Philippines can afford that? Without access to capital? This is where margins come in, commodities are always traded in margins and the margin changes based on the market volatility and the current face value of the contract. Looking at the screenshot above, the maintenance margin is at $4,800 but the initial margin that this particular account is already at $5,280. This means the account owner can buy “coffee” without exceeding the margin impact. This is how anyone who understands futures contract takes advantage of the opportunity to trade commodities like “coffee”.