Smell the beans: Coffee Trading – XP Invest
Coffee is the second largest traded commodity. The two basic plant varieties are Arabica & Robusta. The price of coffee is heavily by macro-economic factors. But just like any other risky tradable instrument, some unpredictable factors that are only controlled by ‘Mother Nature’ also play a part. Let’s go through the Macro economic factors first.
The demand for coffee has been rising globally, you can probably look at the lines outside Starbucks to figure that part out. The price of its beans, however, has been declining. To understand why this occurred we can isolate the impact of its largest producer; Brazil. Brazil is the world’s largest producer and exporter of coffee; they produce close to 30% of the world’s coffee. The value of its currency thus plays an important role in the global price of coffee. When the price of the Brazilian Real fell due to the trade war or due to the election of a more populist leader, the price of coffee also declined with it. If the Brazilian Real was to appreciate against the dollar, the coffee price is also expected to rise with it. In late 2018, coffee approached what most believe is the bottoming out of its low price. Several investors believe that the price of coffee could finally be moving in an upward direction. But as we mentioned, it is one of the more volatile assets that is impacted by multiple factors. So we definitely need to take a more holistic look at all the other factors before jumping to conclusions.
For example, weather also plays a big role in the production of coffee. Extreme heat, cold or moisture can have catastrophic effects on the harvests which result in disruptions in demand and in turn affect the price. With global warming all over the news, there exists a threat that supply is disrupted in a big way due to weather causing a dip in supply, driving up prices.
Some other factors that could very easily impact the price of coffee, like most other commodities being traded include geopolitical factors. Political turmoil leading to disruptions in supply can push prices up for the commodity.
Transportation costs also play an important factor. Given the limited regions where coffee is grown, big logistics networks are involved in transporting the beans. A big change in the oil prices could result in the price of coffee being affected being of the cost of transport being pushed up.
The last factor, which may not play a huge role due to the conflicting evidence could be medical issues arising out of the consumption of coffee. The minute someone with a ‘scientist’ label says that drinking coffee is good or bad for you, the demand will fluctuate accordingly.
That was a quick summary of some of the factors that impact prices, let’s jump in to what we see actually happening in the market and what the prices have been like for the last few quarters. On account of some stellar production, it seems that there has been an excess supply of coffee. The oversupply has come from production in both Brazil and Vietnam. With some dealers expecting another record crop next year. The outlook for prices seems to be subdued.
As a crypto trader, why should you care? Well very simple. Bitcoin, one the most volatile assets on the market does seem to also be creating its own trends as well. Yes, it might be a tricky short-term play unless you understand the game. But in the long run, it does seem to be on an upward trend. This creates a unique opportunity for people to leverage our Coffee/Bitcoin trading pair that we are launching.
Our platform will be listing the trading symbol for Robusta coffee, not Arabica. This does make a difference as Robusta is the coffee more commonly found in blends for cases of mass production because of its nature. It is less impacted by environmental factors and pests as compared to Arabica means.
So instead of visiting Starbucks to order a ‘Tall’, try visiting XP Invest and ordering a ‘Short’.
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