How to Spread Bet on Robusta and Arabica Coffee

Robusta and Arabica Coffee

Coffee, one of the most popular stimulant beverages worldwide firstly originated in Ethiopia and Yemen and robusta Coffee is especially getting increasingly popular with speculators. Robusta Coffee, incidentally, is a type of Coffee bean that has around twice the amount of caffeine compared with arabica, accounts for a third of the world’s Coffee crop and tastes more bitter but gives a higher crop yield than arabica.

Market Dynamics

• Coffee Types: Arabica accounts for 60% of global production and is considered premium, while Robusta is lower grade but more resilient and high in caffeine.
• Global Supply: Brazil leads in Arabica production, while Vietnam and Indonesia dominate Robusta markets.
• Price Influences: Coffee prices are affected by weather, disease, and exchange rates, with Arabica and Robusta responding differently to market conditions.

Coffee Facts

1. Coffee as a tradable commodity is popular because of its increasing volatilility.
2. Coffee is measured in 60kg bags and the commodity is traded in US dollars. So the exchange rate largely influences the price of Coffee (just like Crude Oil) and all things being equal, Coffee will tend to follow the dollar exchange rate. If the Dollar goes down against the Euro, the price of Coffee should go up and vice versa.
3. You can spread bet on both Arabica Coffee ‘C’ and Robusta with certain spread betting providers.
4. Coffee is a market that will often be quiet for considerable periods of time before ‘going berserk’ on the back of a weather report.
5. Brazil is the largest producer of Coffee, but in recent years, Vietnam has become a major producer of robusta beans. Indonesia is the third-largest exporter and the largest producer of washed arabica Coffee.
6. Note that Coffee demand is considered to be price inelastic. If prices increase people will not proportionally reduce their consumption and vice-versa.
7. The biggest companies in the coffee sector are Procter and Gamble, Kraft, Nestle and Sara Lee who buy most of the world’s raw coffee. Therefore monitoring the buying habits of these companies would help provide a better understanding of coffee demand. From a micro perspective, marketing and profit margins and also play an important role in driving demand.

Arabica Coffee Facts

• Arabica is also referred to as Coffea Arabica or Coffee ‘C’ when referring to Coffee futures.
• When Arabica Coffee cherries ripen they fall to the ground and spoil.
• Arabica accounted for around 60% of world Coffee production. Brazil and Colombia produce the majority of the world’s Arabica supply.
• Arabica Coffee is normally traded on the Intercontinental Exchange (ICE).

Robusta Coffee Facts

• Robusta is also known as Coffea canephora and Conillon.
• It is considered to be of a lower grade than Arabica. It has twice the caffeine and produces an inferior taste as it tends to be bitter and have less flavor than arabica Coffee.
• The Robusta plant is easier to take care of and has lower production costs. When its Coffee cherries ripen they remain on the plant.
• The Robusta plant is less susceptible to disease than Arabica.
• The Robusta plant can grow in areas where Arabica cannot.
• Robusta accounts for approximately 40% of global Coffee production.
• Vietnam and Indonesia produce 50% of the world’s Robusta.
• Robusta Coffee is traded on the London-based derivatives market Liffe.

The production of Arabica or Robusta Coffee mainly depends on the weather, harvesting practices and disease. So monitoring these variables, particularly in the major Coffee producing countries, will provide an understanding of Coffee supply and its intrinsic value, when compared with demand. It is also important to understand the market dynamics, so a drought in Brazil might for instance impact the price of Arabica coffee, but not Robusta Coffee so much as less Robusta is produced in Brazil.

The price of Coffee hit a two-year high last October with the price of Arabica beans having hit $2.21 a pound with weather forecasts predicting lower precipitation in Brazil’s coffee producing areas. Other countries like El Salvado, Guatemala Honduras and Panama are also facing similar drought conditions as well as coffee rust – a fungus which hits crops.

Spread Betting Robusta and Arabica Coffee

The current spread for Coffee Robusta is $2196 – $2204. That means you can spread bet on Coffee to close lower than $2196 per tonne or higher than $2204 per tonne. If you were betting £2 per dollar and the price of a tonne moves $20 then your profit / loss would alter by (£2 per dollar) x $20 = £40.

Remember also that when spread betting soft commodities although the units the commodities are traded in on the exchanges is fixed, when spread betting on commodities you can trade in the currency that suits you eg Pounds per unit, Euros per unit or Dollars per unit.

Coffee Arabica is traded in 0.01cents/lb (pound). Therefore you could bet 5 euros per 0.01 cent for instance that Arabica goes up or down. If the price / lb then moved by 0.30 cents then your profit or loss would alter by 5 Euros per 0.01 cent x 30 = 150 Euros. Likewise you could bet £8 per 0.01 cent that Arabica goes up or down. If the price / lb then moved by 0.20 cents then your profit or loss would alter by £8 per 0.01 cent x 20 = £160.

One analyst at a spread betting company commented, ‘Coffee trades are now coming through, even though the market has been weak in recent trading, down to $1,459. The nice thing about it was that it had risen to a high of $1,576 before the fall. Coffee is popular now because it is volatile, it has become one of the more tradable commodities.’

Spread Betting Examples

• Robusta Coffee:
  • Spread: $2196–$2204 per tonne.
  • Bet: £2 per dollar, price moves $20.
  • Profit/Loss: (£2 × $20) = £40.
• Arabica Coffee:
  • Spread: $1.459–$1.576 per pound.
  • Bet: £8 per 0.01 cent, price moves 0.20 cents.
  • Profit/Loss: (£8 × 20) = £160.

Risks and Limitations

• Volatility: Coffee markets can remain static before reacting sharply to events like weather reports or disease outbreaks.
• Currency Sensitivity: As coffee is traded in USD, exchange rate fluctuations significantly impact prices.
• Elastic Demand: Despite price changes, coffee consumption remains steady, adding stability to demand dynamics.

Practical Tips for Spread Betting

• Monitor Weather Patterns: Droughts or excessive rainfall in major coffee-producing regions directly impact prices.
• Understand Production Trends: Arabica is more susceptible to weather and disease, while Robusta is more resilient and cost-effective.
• Watch Major Buyers: Tracking purchasing behavior of companies like Nestlé and Kraft can provide demand insights.

Future Outlook

• Weather and Disease: Continued monitoring of conditions in Brazil, Vietnam, and other key regions is essential for understanding supply trends.
• Volatile Opportunities: Coffee’s unpredictable price swings create lucrative opportunities for experienced traders.
• Global Demand: Coffee’s inelastic demand ensures its continued relevance in commodity markets.