Coffee and the Economy
Coffee has a significant impact on the economies of over 40 producing countries. In value, it is second only to oil in terms of international trade. It surpasses sugar, rice, and wheat as the major agricultural commodity.
There are two main types of coffee:
Robusta: Grown at altitudes usually up to 800 meters. Indonesia, West Africa, Brazil, and Vietnam are the most dominant growing areas. Robusta currently represents around 30% of world production.
Arabica: Grown at altitudes between 600 and 2000 meters. Latin America and East Africa are the most dominant growing areas. Arabica currently represents around 70% of world production.
Robusta Coffee Production
It takes about four years for a coffee bush to produce a useful crop. The first sign of the size and health of the crop is the white flowers which appear along the branches. The fruit or "cherry" (named because of its resemblance, not its flavor) is green at first, but changes to yellow and finally to red when it ripens.
The cherry should only be picked when red, and the work is extremely labor-intensive. Coffee cherries do not ripen simultaneously even when they are on the same branch. This makes mechanical picking a non-viable option, although it is used in some areas. Coffee bushes are kept at a manageable height of around six feet for harvesting purposes.
Depending on the country of origin and the quality of bean, coffee is usually processed in one of two ways:
Dry Processing: Cherries are spread out on the ground to dry in the sun for two or three weeks. The cherries are then fed into machines that remove the outer husk. The green bean is now ready to be cleaned and sorted.
Wet Processing: Ripe cherries are soaked or fermented in tanks until the outer layer is ready to be moved. This layer (the “pulp or "mucilage") is then removed by machine. The bean is then left encased in a dry brittle covering known as "pergamino" or "parchment". The coffee can be left in this state for some time, or the parchment can be removed in order to sort the coffee into grades.
Of the two methods, Wet Processing is considered to produce higher quality coffee that is also more expensive.
Futures and Options Contract Information
The NYSE Euronext Robusta Coffee Futures contract was launched in 1958 (by the LCE, later acquired by LIFFE). It is used globally as the benchmark pricing mechanism for Robusta Coffee.
It was the major coffee price rises of the 1970s that caused use of the contract to rise substantially as more and more industry businesses realized the benefits of using futures as a risk management tool. Since then, the use of coffee futures and options as a hedging medium has become an almost integral part of the international industry. All players involved are able to minimize the losses associated with unfavorable price movement. Futures and options volumes currently equate to about five times the global production of Robusta Coffee.
Coffee futures and options have been traded on LIFFE CONNECT since November 27, 2000.
Futures and Options Market Users
The main contract users are coffee exporters, international trade houses, European and U.S. coffee roasters, managed futures funds, institutional investors and options specialists.
The long term support of the underlying coffee trade and industry has ensured that Robusta Coffee futures retain their role as the premier price fixing medium for physical coffee contracts. The contract's close relationship to the physical market place, as well as high levels of market liquidity, have continued to attract an ever-increasing level of business from the international investment fund community.
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