Coffee Trading Glossary

To compliment our weekly market reports we've developed a glossary of terms to cover the main definitions you'll encounter from week-to-week. This list is not exhaustive so if it's missing anything you'd like clarifed, please let us know in the comments section.

---

AUD

Symbol for the Australian dollar. The rate of exchange against the US dollar will have an influence on prices for importers.

Backwardation

When the closest contract month has a higher price than prices for months into the future. This generally occurs when there is high spot demand or in response to short-term impacts.

Bearish

A market is considered bearish when prices are falling. Bearish indicators would suggest that prices will fall in the future.

Biennial Production

Coffee trees produce higher yields in alternating years, the swing between these yields can be determined by the varietal and also the climate in which it grows. Often referred to as “on-years” and “off-years”.

Bullish

A market is considered bullish when prices are rising. Bullish indicators would suggest that prices will increase in the future.

Candlestick Chart

These are the charts that accompany the market report each week. Candlestick charts are a simple way of visualising market prices. Green candles indicate an increase in price from the start of the trading session, whereas red candles indicate a drop in prices. Each candle also displays four pieces of data: the price at market open, the price at market close, the day’s highest price and the day’s lowest price.

Certified Stocks

Certified stocks are coffees that have been graded by the International Coffee Exchange (ICE) and are stored at a licensed warehouse. These stock levels ensure that physical coffee is available to fulfill a coffee futures contract should the need arise. The amount of stock held in ICE inventories can provide an indication of market sentiment on both the physical availability of coffee as well as the futures price.

Coffee Futures Contract - arabica (KC)

The ICE Coffee C contract is the world benchmark for arabica coffee. The contract prices physical delivery of exchange grade green beans, from one of 20 countries of origin in a licensed warehouse to one of several ports in the U. S. and Europe. One contract is equal to 37,500lb, or 17,010kg and can be bought against different points in the future, segmented by the following terminal months: March, May, July, September, and December. Coffee C Futures | ICE (theice.com)

Coffee Futures Contract - Robusta (RC)

The ICE Coffee R contract is the world benchmark for Robusta coffee. The contract prices physical delivery of exchange grade green beans, from any origin that is freely available for export to an Exchange Nominated Warehouse in Europe or the U.S.A. One contract is equal to 22,000lb, or 10,000kg and can be bought against different points in the future, segmented by the following terminal months: January, March, May, July, September, and December. Robusta Coffee Futures | ICE (theice.com)

Coffee Traders

Also known as commercials. These are market players who are buying and selling coffee contracts to hedge pricing on the physical coffee they will receive.

Commitment of Traders (COT) Report

Buyers and sellers on commodity markets are categorised as either “commercial” or “non-commercial”. Commercial participants are coffee traders dealing in physical coffee hedging price risks. Non-commercial participants are investors speculating on the direction that coffee prices will move in and attempting to capitalise on these movements. The COT report provides an indication of how these different market participants are positioned in terms of holding long or short contracts on commodity futures and options markets. Speculators are a major contributor to price movements and the reports provide a snapshot of how they are positioned in the market.

Contango

When the market has higher prices for future contracts than the front month. This is considered the norm as contracts further into the future must account for storage costs.

Convert to Physical

This is when a futures contract is closed and converted to physical stock to be drawn down from inventory in one of the ICE warehouses. Conversion of contracts to physical stock attracts differing surcharges depending on its location.

Consumer Price Index (CPI)

A weighted average of prices of a basket of consumer goods and services, e.g. transportation, food and medical care. The CPI is often used for identifying periods of inflation or deflation.

Downtrends

A type of trendline. Downtrends will have lower highs and lower lows with the line drawn along the top of the trend.

First Notice Day (FND)

For Arabica contracts, First Notice Day (FND) occurs 7 working days before the last working day of the calendar month. It is the first day that an investor who has purchased a futures contract may be required to take physical delivery from the exchange. Physical coffee traders, like us, close out our position (fix the price) before this day because we don’t want to take any delivery of coffee from the exchange.

Front Month

The Front Month is the Terminal Month closest to the current date. Since the Front Month has the shortest time to contract expiration, it generally has the largest trading volume as market players look to close their positions.

Fundamental Analysis

Fundamental analysis relies on market and global events to predict future market trends. Reports on future harvest levels and weather events are common fundamental indicators. There is a large focus on events in Brazil for fundamental analysis due the amount of coffee it produces.

GCA Stocks

The Green Coffee Association (GCA) is responsible for governing green coffee contracts between the USA and its supplying countries. Like ICE inventories, the amount of stock held in US warehouses can have an effect on market sentiment.

Hedge

An investment to minimize or offset the chance as asset will lose value because of adverse price movements.

Long Position

Holding a long position means that you own the contract and are expecting prices to rise in the future. Also know as a bullish position.

Open Interest

The number of ‘open’ positions in the futures market. Every time a trader buys (long position) or sells (short position) a futures contract, the opposite transaction will need to be completed at sometime in the future to close their position. Until their position is closed, or the contract is converted to physical stock, that position will be considered to be open and counted as part of the Open Interest number.

Overbought

A market is considered to be overbought when prices have climbed quickly over a short time period and experts believe that its underlying stocks are being traded at a price in excess of their true value.

Oversold

A market is considered to be oversold when prices have fallen quickly over a short time period and experts believe that its underlying stocks are being traded at a price below their true value.

Risk On / Risk Off

Refers to changes in investment activity as a response to global economic patterns or events. The theory which states that investors tend to engage in higher-risk investments during periods where risk is considered low, a ‘risk on’ period. Equally, when risk is perceived to be high investors tend to engage in lower-risk investments, a ‘risk off’ period. Commodity markets such as coffee are generally considered a riskier investment due to higher rates of market volatility.

Short Covering

Short covering is when speculators holding short positions are buying because they are holding too many contracts and prices are tracking upwards.

Short Position

A trader holds a short position when they sell a contract without actually holding it, in the anticipation that prices will fall before the settlement date that the trader will be required to transfer the contract to the buyer. Also known as a bearish position.

Speculators / Funds

Also known as non-commercials. These are market players who are buying and selling coffee contracts to leverage profit via price fluctuations. They will never receive physical coffee.

Technical Analysis

Technical analysis relies on the analysis of market charts and price movements to detect underlying patterns and predict future market trends.

Terminal Month

Refers to the month that a futures contract expires, and when the underlying asset must be delivered or settled. Every futures contract will be assigned to a Terminal Month in the future. Terminal Months are represented by a single, specific letter known as the contract symbol:

In the case of arabica (KC) these are:

March – H | May – K | July – N | September – U | December – Z

​In the case of Robusta (RC) these are:

January - F | March – H | May – K | July – N | September – U | November – X

Trendlines

Trendlines help to determine the trajectory of a market. Lines are drawn onto a chart through 3 consecutive points to help visualise price movements. These lines can result in an uptrend, a downtrend, and a sideways trend.

Uptrends

A type of trendline. Uptrends will have higher highs and higher lows with the trend line drawn along the bottom of the trend.

USD

Symbol for the US Dollar. All coffee contracts are traded in this currency. The rate of exchange between the USD and local currencies will influence prices for both exporters and importers.