Trade Coffee

Coffee

If you decide to trade in coffee finding liquidity will probably not be your biggest issue. Trading volumes of coffee is the second largest in the world next to oil. The trading value is several hundreds of billions every year. Below we will go through some aspect and information that we think will be of great value if you decide to or wants to trade in coffee.

Coffee trades mainly in two types of beans, Arabica and Robusta. Arabica is considered to taste a bit better and therefore have a higher price than the Robusta bean. But the Robusta bean contains 50% more caffeine than the Robusta bean. Hence the Arabica bean is mostly used for the brewing of coffee and Robusta for extract caffeine which is commonly used in several products.

Coffee was first grown in Ethiopia for over 2000 years ago and from Africa it found its way to the middle east and travelling salesmen, which later spread it from the middle east.

Coffee grows on bushes as beans, when you first plant the bush it takes between 3 to 5 years for the bush to hold fruit, or beans in this case. Later the beans are harvested and often dried and roasted to among others become brewing-coffee.

 

The larges producers of coffee in the world is Brazil, Vietnam, Indonesia, Colombia and Ethiopia. The roasting of the beans does not happen in those countries but in the counties where the bean is consumed. The larges consumers of coffee and therefore the biggest importers of coffee is the European Union, the US but also Russia and Japan.

What tend to affect the supply and demand of coffee?

  • Geopolitical effects
  • Climate changes
  • The global economy
  • Speculators
  • The USD and the price of oil

The producing countries of coffee is seen as counties with low political stability which will affect the supply of coffee, this can be of a long-term effect and a short-term effect but as the top 5 producing counties of coffee produces 2/3 of the total production political stability or the lack of political stability is something you hare to have in mind when you trade in coffee or invest in coffee since it can both create opportunities and traps.

The coffee plant is a sensitive plant and can easily be affected negatively on changes in the climate. The producing countries are located among the equator and need just the right amount of water and sunshine. Changes in climate that will affect the yield of the coffee-plant production will also affect prices and something you have to consider or have an opinion about when you trade in coffee.  

Top 4 buying companies of coffee in the world is Proctor & Gamble, Kraft, Nestle and Sara Lee, these 4 companies make up to 50% of the total buying-volumes in the world. As almost all global companies these 4 players are too dependent of the global economy, so an expanding global economy will probably be supportive for the price of coffee and vice versa if the global economy gets weaker. An investment in coffee could be a way to play the global economy if you want to trade in commodities.

Speculators will have an impact on the price of coffee, as seen in the beginning of this section, coffee is one of the most traded commitiese in the world and the liquidity will attract speculators which will also have an impact on the price of coffee. In theory this will probably have the biggest impact on a shorter time horizon and mostly a factor you need to consider when you trade in coffee but can also create a good entry point if you want to invest in coffee.

Coffee like all commodities is priced in USD, a weak or a strong USD can change the price perception of coffee and there for change the demand. The price of oil will also have an aspect in the price perception of coffee since its seldom consumed where its produced and transportation is a factor consumer have to consider when they buy coffee  

 

Reasons why you might want to invest in coffee

  • Portfolio diversification
  • Profit on climate changes
  • Hedge on inflation
  • Good liquidity

Commodities has a low measured correlation to other asset classes and an investment in coffee or another commodity will in theory increase your diversification of your investment portfolio. A low level of covariance is sought after for investors to decrease your measured risk in your portfolio so an investment in coffee could help you to decrease your overall risk in your investment portfolio.

As we wrote about earlier the coffee plant is a sensitive one, an investment in coffee could be a way to play the changing climate in the world.

Commodities does often increase in price when the inflation increase and the price of a commodity does often decrease when the inflation decreases, ie it has a high correlation with inflation. If you have other investments in your portfolio that might perform poorly when the inflation is high an investment in coffee could go up in value then and act as a hedge on inflation.

Trade in corn

Corn

When trade in corn, you trade in a commodity that is grown all over the world except Antarctica. United States is by far the biggest producer of corn in the world with ca 40% of total world production. China, Brazil, Argentina and several nations in the European Union is also big producers. Corn is not only used as food for humans and animals but also an important crop when it comes to produce biofuel, hence all these possible products you can create with corn is something you have to have in mind while investing in corn or trading in corn. Below we will go through some events and actions, and exemplify, that can affect the supply and demand of corn and therefor also the price.

When corn is used as food for humans its often in its fresh form, popcorn or as flower to make cornbread. But also for corn starch to thinken sauces and several spirits is made out of corn, several whiskeys for example. Dried corn is one of the most used feedstuff for chickens but processed corn is also common as animal feed.

Corn was fist domesticated buy humans in the southern parts of Mexico around 10.000 years ago and was brought to Europe by Cristopher Columbus.

As you can see on the corn-plant it looks a lot like an overgrown straw of grass i.e. its quite logic that corn is a member of the grass family.
Farmers start with plating a seed in the spring and harvest during the fall, in the USA which is the biggest producer of corn the planting occurs between April and June and they harvest between October and November.
Corn grows in similar environments as the soybean and its quite common that farmers in the beginning of the season decide what to grow, and they will probably choose the crop that they think will bring them the biggest profit. We will go through this later in the text but when you trade in corn the price relative to soybean is something you should have in mind and its quite easy for farmers to changes their crop from one year to another.

 

What affect supply and demand in corn?

When you trade in corn what you really do is try to predict price-moves, and the price often move due to supply and demand, so bellow we will try to exemplify and show some events that may move the supply and demand for corn which also can affect the price of corn.

  • Changed demand for biofuel
  • The price of soybean
  • Governmental changes in subsidiaries and laws
  • Emerging market’s Economic development
  • Weather

As explained above corn is one of the most common used crops in the production of biofuel. And if the government change taxes or subsidiaries on biofuel this can affect the demand for biofuel and also corn. Right now, several governments subsidize biofuel which will probably increase the price on corn and can be a reason you want to be positioned long when you trade corn.
The price of fossil fuel can also increase the demand for biofuel, if the price of fossil fuel increases too much consumers may look to buy more biofuel, but an “event” like that will not happened over night and is a scenario for a person who wants to invest in corn rather than trade in corn.

 

As we mentioned above, the corn-soybean ratio is something you need to consider when you trade in corn, its quite easy for a farmer to change his or her crop from one year to another, from corn to soybean or vice versa, from soybean to corn. As most business owner farmers is too motivated to maximum their profits. A low or high price on corn or soybean can affect the amount of land farmers use to grow corn or soybean which is something you have to remember when you trade in corn so you don’t get surprised with a bigger or smaller harvest that you thought of in the beginning of the season when farmers decide what to grow. The planting season is as we said above between April and June in the USA, so if the soybean price is high at this period this can increase the amount corn farmers grow and decrease the harvest of corn in October to November.
As a rule of thumb when the corn-soybean spread is below 2,1 to 1 corn is historically expensive, meaning that you “only” need 2,1 pounds (or less) of corn to buy one pound of soybean. When the spread corn-soybean is above 2,4 to 1 soybean is seen as expensive which means that you need 2,4 pounds (or more) of corn to buy one pound of soybean.

 

Government and laws play a major role in farming. Farming and farmers can often be attracted to change their crops to something that the government wants, like in the biofuel example above. This can and will change the willingness for farmers to grow corn and something you have to have in mind as an investor or trader in corn. A change in laws can increase the incentive for a farmer to grow more or less of corn and affect the supply and therefore the price of corn.

Emerging markets does play a major reason in several commodities and corn is no exception. As we wrote earlier corn is commonly used as animal feed, and as economies grow people tend do eat more meat which can in the long run increase demand for corn and a theme a long term investor in corn could or should have an opinion on.
Several emerging markets has also improved and increased their use of environmentally-friendly energy sources, and as we have mentioned in several occasions above, corn is commonly used in biofuel production.

Weather is always something you need to have in mind and make up your opinion about when you trade in corn. And as other crops corn need to have enough amount of sun and water, and not too much of anything. Extreme weather can affect harvest both in amount and quality, long-term weather changes is something you need to have in mind if you invest in corn and the weather changes of a more short-term like floodings is something you need to have in mind when you trade in corn or use as a good entry point as an investor in corn.

 

Reasons you might invest in corn

  • Hedge on inflation
  • Play the biofuel trend
  • Diversify your portfolio
  • A play on emerging markets demand

Inflation tend to have an impact on commodities and invest in corn can be a way to protect or profit from changes in inflation. High inflation tend to be supportive for commodity prices  and low inflation does often have a negative impact on the price of corn or other commodities. An investment in corn can bee seen as a hedge against inflation since some other asset classes can perform poorly during times of high inflation.

Biofuel does have an impact on the demand of corn, are you bullish or bearish on the future consumption of biofuel? Go long or short corn can be an investment that can make you money if you predict the future of biofuel correctly. And invest in corn is something you can do both on the long and the short side.

Diversification is a major reason for investors to look for an investment in corn. Commodities in general has historically had a low correlation to other asset classes, so ad an investment in corn to your portfolio will in theory increase your diversification.

As we mentioned several times above emerging markets with china in the front are big consumers of corn or products that need corn as an input, like biofuel and meat. An investment in corn can be a way to play a change in the emerging markets demand and economy both if you are positive or negative.

Trade in rough rice

rough-rice

If you start trading in rough rice you are trading in one of the worlds most important food products for human beings. Rough rice or rice was first grown over 10.000 years ago when humans in China Asia started to refine grass. Rice is one of the most important nutrient for humans in Asia, the Middle East, and Latin America and is the third most grown crop in the world after corn and wheat. Today mostly two types of rough rice is grown, Japonica and Indicia. Japonica is generally grown in some bit cooler areas and gets sticky when you boil it. Indicia on the other hand is generally grown in some bit hotter areas compared to Japonica and does not get sticky when you boil it. Typical countries where Japonica are grown is the southern parts of Europe, like Spain, Italy and Portugal, and in Japan and the USA, mostly California. Indicia’s typical growing areas are the southern parts of Asia, like India, Thailand, Vietnam and southern parts of China.
China is the biggest producer of rough rice in the world with India as number two. Indonesian, Bangladesh, Vietnam and Thailand are also big producers of rough rice.

 

What affect supply and demand in rough rice

When you trade in rough rice or any other commodity its important to have an idea of what affect and changes the supply and demand of that specific commodity. Hence this is what you should analyze and getting good at when trading in rough rice in order to increase your probability of profitable trades.

  • The quality of the harvest
  • Technical improvements of farming rice
  • Population growth in consuming countries
  • Stock levels
  • Fuel prices, growing rough rice is quite fuel consuming
  • Tariffs or changed trade policies between importing and exporting counties

As you can see above there is a lot of things that can affect the demand and supply of rough rice and there for also the price. In order to trade rough rice, you should probably target the short-term impacts of the price and if you want to invest in rough rice you should possibly target more long-term impacts. Below we will exemplify these events and see how they can affect your trading in rough rice.

The quality of the harvest is always something you need to consider when you trading a soft commodity and rough rice is no exception. The quality of the harvest can be something both for the one who trades in rough rice and the one who is more long-term and invest in rough rice. Too much sun and too little water can be short-term effect due to natural variation of the weather every year and can create trading opportunities both on the long side and the short side. Global warming will affect the weather in a long-term way and can be an aspect an investor in rough rice need to consider.

Technical improvements of farming are something that is more of a long-term effect and something you need to target if you want to invest in rough rice and make up your mind to. Inventions are getting better and better all the time in the farming industry but a big technical move can change the costs of growing rice and hence change the supply and therefore the price too.  

Stock levels is also something that you need to consider when you trade rough rice, when the farmers harvest their rice will it have the effect of the supply and the price as you think or can a stock level above or below “normal” levels change the supply of rice? This is an effect that is in medium time frame and something both the investor and the trader of rice need to consider.

Fuel prices the production of rice is energy consuming since you need quite a lot of machinery, both when it comes to preparation and harvesting the land but also controlling water levels on the rice fields. So, any change in oil price will change the profitability for the farmers of rice which can change their mind on what they decide to grow next year. This can be of medium to long term effect and probably something an investor in rough rice need to consider if, for an example a rise in oil price is not compensated with a technical improvement.

Tariffs and other changes in trade policies are something both an investor and a trader in rice need to consider. Rice is conusumed all over the world but not grown all over the world hence its an important good to trade. A change in tariffs is a binary event and before and after a decision the price can be volatile and create good opportunities for a person who like to trade rough rice. And a world who gets more protectionist can change the demand for rice and something you need to consider and make up your mind about when you are investing in rough rice.

 

Reasons you might invest in rough rice

  • Bet on change in demand, both from emerging and developed markets
  • Inflation hedge
  • Portfolio diversification

As we have went through above rice is consumed all over the world but only produced in some areas of the world. Asia is probably the biggest consumer of rice in the world and most of the biggest emerging markets in the world are located in Asia. When the economy in emerging markets improve people tend to increase their budget on food, hence an investment in rice could be something you can profit on your thesis on the economy of emerging markets.

Commodities tend to correlate strongly with inflation, meaning that high inflation is often good for commodities and prices goes up, vice versa if the inflation is low. Hence several investors often have a position in commodities to profit from their opinion on inflation, and an investment in rough rice can be one way to play and profit from your opinion on inflation or be a good hedge against inflation.

Rough rice and other commodities has a low correlation between them and other asset classes meaning an investment in rough rice can improve your total portfolio diversification.

Trade in soybeans

Soybeans

To trade in soya bean has become more and more popular during recent years since the interest in the bean itself and its end products has increased. The soya bean is one of the most important leguminous plant in the world and one of the biggest sources of plant-based proteins. The soya bean can be used as animal feed, for producing vegetable oil, biofuel, and also tofu and soymilk. In commodity trading you do not only just trade in soya bean, you also trade in:

  • Soybean meal
  • Soybean oil

When trading in soybean it’s important to know where its produced and grown, top producing soybean countries in the world is the United States who produces ca 1/3 of the worlds production of soybean, on second place we have Brazil and Argentina on the third place.
Top importers of soybean are China, the European Union, Mexico and Japan.

 

What affect supply and demand of soybean

If you want to trade or invest in soybean you must also know what will affect the price of soybean, hence what will change the demand and supply of soybean. Below we will list some ideas of what can change the supply and demand of soybean and later exemplify them:

  • Weather conditions that will affect the harvest
  • Health trends
  • Demand for vegetable oil both for bio fuel and food
  • Emerging markets demand
  • The American harvest
  • Price on corn

Weather conditions is always important for crops and is something you have to consider if you trade in soybean. Extreme weather can create good trading opportunities both on the long and the short side.

Health trends, has been a driver for demand on soybean the recent years. Some people in prefer vegetarian diet and soybean is full of protein and a good substitute for meat if you are vegetarian, both on the bean itself and tofu. Change in news flow regarding health aspects of vegetarian food can change the demand for soybean and there for also change the price of soybean. This type of news flow does not change over the night so might be

Soybean holds fat, and fat is energy and energy is what you need to produce fuel, several countries and politicians prefer bio fuel before fossil fuel hence subsidies for producing biofuel will encourage farmers to change their crops to suitable crops for biofuel. One of the most common crops for biofuel is corn, and soybean and corn grows during similar conditions making it easy for farmers to choose one year to grow corn instead of soybean if its more profitable, so this aspect is important to have in mind when you trade in soybean.

Emerging markets demand is important for the price of soybean, as we mentioned above, China is one of the biggest importers of soybean in the world even though they are one of the world’s biggest producers too hence they consume more soybean than they produce. And when the economy grows their demand for food will also grow and increase the demand for soybean. Soybean is also commonly used as animal feed, and when the population gets richer they often tend to demand more meat, which will increase the demand for soybean. This is also an effect that will take longer to evolve than a binary event like a change in subsidiary of a crop which you should have in mind when you trade soybean. The effect of your case can take longer than you think.

The American harvest, as we said in the beginning, the USA is the largest producer of soybean in the world. The weather in the USA will have an effect on the supply of soybean if the harvest is good or not. This will also affect prices and what the American farmers decide to grow next year.

The price of corn, as we mentioned under the “bio fuel” section corn and soybean grows in the same type of conditions and it’s not uncommon that a farmer will grow both soybean and corn, and it’s easy to change the size of the crop each year, depending on where the farmer thinks he’ll get the biggest profit. In May and July, the farmers decide what crop to grow, if farmers choose to grow more of one crop this will affect the size of the harvest, hence the supply of that crop and also the prices of that crop. When trading in soybean its always important to have an eye on the price ratio of soybean and corn, lower price on corn can increase the supply of soybean and affect your result later when trading in soybean.

 

Reasons to invest in soybean

  • Portfolio diversification
  • Long term trends, speculate on changes in demand and supply due to emerging markets or health trends
  • Inflation hedge
  • USD

Several investors looking at investing in commodities for diversification purpose. Most investors who looks at trading in soybean already has stock related investment or bond portfolios and since the correlation between commodities and other asset classes is low, soybean and other commodities can be a good asset to decrease your average risk in your portfolio.

Long-term trends can be a reason for investors to look at soybean as an investment. We have touch upon some of the more long-term aspects that can change the demand for soybean and create a good opportunity to trade in soybean both on the long and the short side. Long term trends can be the health aspect of eating more vegetarian food and also the increasing demand from the ermine markets that may affect the demand for soybean.

Commodities is seen as a good hedge against inflation since commodity prices tend to go up when the inflation increases and vice versa when the inflation goes down. Recent years loose monitary policies with quantitative easing has increased the interest from some investors in commodities and is an aspect you should consider and have an opinion on when you trade soybean.

USD is important for the price of soybean as it is no exception when it comes to which currency it trades in, it is the USD as the most commodities hence a weak or a strong USD can affect demand for soybean as buyers in other currencies than the USD will think of soybean as cheap or expensive. So if you have a view on the USD, trade in soybean can be a way to play it either short or long.

Trade in wheat

Wheat

If you decide to start trade in wheat you are trading one of the most important crops in the world, both for humans and animals. Wheat was first grown over 9000 years ago in the southwest parts of Asia, but today its produced all over the world. Since the production area is so widespread over the world, wheat is harvest at a place all year around somewhere in the world which is something you need to have in mind when you trading wheat since the seasonal variation tends to be a bit lower compared to other commodities.
The largest producers of wheat in the world is the EU, USA, Russia, Australia, Canada, and India.

The most active areas when it comes to export of wheat is Russia, the European Union and the US, hence these areas and nations are growing more wheat than they consume locally in their country.

In food wheat is often used in the shape of flower to do bread, sweats of pasta.

What affect supply and demand of wheat

When you trade in wheat it’s important to have an idea why the prices move, below we will list some events and factors that affect the price of wheat:

  • The quality of the harvest
  • Farming subsidies and other benefits for farmers that may force them do grow more or less wheat
  • Import and export tariffs
  • The price of energy, the production of wheat is quite energy consuming, so the price of fuel will affect the profitability for farmers hence also their will for growing wheat
  • Substitute, if other crops change in price so might wheat do, since you can use another crop for animal feed
  • Stock, what is in the storage of the last harvest?

Since the area where wheat is grown is so large and well spread over the world the price of wheat tends to be less volatile compared to other crops, hence trade in wheat might be more suitable for a trader with less experience or the one who trade in commodities with a little longer time horizon. Even though weather does not play as major role for the supply of wheat as it does for other crops it still plays a major role for the supply and there for also the demand of wheat. To understand what weather conditions which is good for the crop plays a major role in successful trading in wheat. It’s never good with too much of anything, both sun and water. Too much sun will create drought and will harm the harvest and will force the farmers to water the crop, and if they cannot afford that the crop can die and decrease the demand for wheat and force up the price. Too much water can also damage the crops especially when its harvest, since wheat need to be dry when it is harvested.  

Often traders look for action and volatile prices, and the more long-time holder does not appreciate that in the same extent. So, if you want to trade in wheat you should start looking for events that you think will affect the price in wheat and maybe in binary events, maybe if a tariff is up for approval at the parliament, if a potential tariff will be approved or not may cause a good trading opportunity in wheat or just before the actual approval or disapproval and can create good opportunities when trading in wheat.

If you want to trade in wheat with a longer time horizon you should look for events that will take longer to evolve. Let’s say that you have a reason to believe that the harvest of another crop that is important for animal feed, and if the supply of that crop goes down, the price of that crop will most likely go up, and farmers may look for other alternatives to feed their animals, with wheat for example. Hence it may be a good idea to trade in wheat and allow this price effect o evolve fully and that might take a while.

Reasons to trade wheat

  • Speculate on changes in demand and supply
  • Inflation hedge
  • USD
  • Portfolio diversification

Speculation on the change of demand and supply is one of the most common reasons to trade in wheat and in the section above we went through some scenarios that might create good trading opportunities in wheat.

Inflation tend to affect prices of commodities and wheat is no exception, high inflation will often force prices to go up on a commodity hence if you have believed the inflation will go in one direction it might be a good reason to trade in wheat, both on the long and the short side.

USD, the American dollar is probably the most important currency in the world and most commodities are priced in USD. So any change in the American dollar can affect the price of wheat, a weak American dollar will decrease the price for potential buyers in other countries and create an increase in demand. So have a view or an opinion on which direction you think the USD will go can help you when you trade in wheat.

Portfolio diversification is one of the most common reason people start to trade in wheat and other commodities. Commodities tend to have low correlation compared to other asset classes which is an aspect investor strive for when they are looking for an asset class to invest or trade in.