If you are new to spread betting on coffee and other softs then it is always a good idea to have an overview of the basics of the market.

World Coffee Consumption

In 2007 coffee consumption came to 123 million 60kg bags, representing a 1.63% year-on-year increase. America was the largest consumer of coffee representing over 17% of the market. Brazil was the second largest coffee consumer and accounted for more than 13% of global coffee consumption.

US coffee consumption over the past five years has varied between 20 and 21 million bags. However Brazilian consumption has been growing at an average rate of 5% per annum over the past five years, with 2007 growth surpassing the average and growing 6.4% to 17 million 60kg bags. Assuming coffee consumption growth in America remains at current levels, then Brazil could surpass America in being the world’s largest consumer within the next five years.
Germany, Japan, Italy and France are the next major coffee consuming countries; each country consumes between 4% and 8% of total world coffee consumption.

Together, the six countries consumed a total of 65 million bags in 2007, accounting for 53% of the world’s coffee consumption.

Consumption Variables

As Anthony Grech of IG Index reported earlier this year “It is important to note that consumption, or demand for coffee, depends on the price and currency strength in the producing country, versus the importing country’s currency. In addition, consumer tastes, number of substitutes and population growth are some of the major factors that influence demand.”

Input Cost Variables

According to the International Coffee Organisation (ICO) the weakening US dollar and soaring price of oil in 2007 and first half of 2008 has increased coffee production costs. In order to help counter the problem of rising costs in the coffee supply chain, Brazil and Colombia, the largest coffee producers, have been implementing compensatory schemes. The Brazilian authorities recently renewed their ‘PEPRO’ programme, which aims at supporting coffee prices through auction sales, and the Colombian government has been reimbursing coffee growers up to 24% of their annual fertiliser costs. Such government compensatory schemes are likely to continue supporting coffee supply.

Coffee Production Growth

On a global scale, the ICO predicts that world coffee production in crop year 2008/2009 is to rise by around 3% to 127 million 60kg bags.

Supply and Demand

The rate of consumption has been growing at an average of 2% pa over the past five years. Assuming that consumption continues to grow at the same rate then it could rise between 125 million and 126 million 60kg bags in 2008/2009 and to 127 million and 128 million bags by 2009/2010. This is roughly in line with the estimates provided by the ICO, which predict world consumption to reach 125 million bags in 2008/2009 and 127 million bags in 2009/2010.

Coffee Pricing and Quality

Note that if you are spread betting on Coffee that there are two types of coffee that you can trade; Robusta and Arabica.

Robusta is the lower quality coffee and accounts for approximately 40% of world coffee production and is more likely to come from Vietnam and Indonesia.

Arabica is the higher quality coffee, accounts for 60% of world coffee production and is more likely to come from Brazil and Colombia.

You can trade coffee and get live coffee trading charts at companies like IG Index and Financial Spreads.

Spread bets carry a high level of risk to your money and may not suit all forms of investor. You can lose more than your initial investment so make sure you only speculate with capital that you can afford to lose. Likewise make sure you understand the risks involved and seek independent financial advice where necessary.

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