Introduction to Trading Coffee, Sugar & Cotton

Coffee

Coffee is one of the most prominent soft commodities. There are two main types of coffee crop which are traded and consumed, Arabica and Robusta.

The market for Arabica is the larger of these two species.  Coffee is almost exclusively used for human consumption.

Coffee is one of the most popular hot drinks in the world.

Major Producers, Importers & Exporters

The largest producer of coffee is Brazil, who account for over one-third of the world’s coffee production.  Other notable producers of coffee are Vietnam and also Colombia.  These major producers all share something in common in that they are all based in tropical and subtropical climates, where the crop tends to flourish. They are also developing nations.

Brazil is the major producer of Arabica and also one of the most prominent producers of Robusta too.  Given the dominance of coffee production in Brazil, the coffee market is very sensitive to factors which impact upon supply from Brazil.  Their importance in the coffee market should not be overlooked.

Vietnam is a growing power in international coffee trade, being the number one Robusta producer.  Technological advances made by some of the leading coffee manufacturers means that the cheaper, poorer quality Robusta coffee can now be manufactured to produce a less harsh tasting coffee product for the consumer.

Given its low prices compared with the finer Arabica coffee, there may be an increase in Robusta demand over Arabica in the future. Some of the major importing nations are the leading developing nation, notably the US, the EU and Japan, where the coffee beverage is very popular.

Issues Impacting Demand

Accordingly, issues which impact upon demand from these nations may have an effect on the markets. Coffee is harvested yearly in the dry season.  In the largest coffee producing nation, Brazil, you need to be aware of the impact of frost and drought which can afflict the crop.

Frost particularly impacts the crop in the summer months, or the southern hemisphere’s winter, however, the occurrence tends to be limited to once every five years.  In light of Robusta, you need to pay attention to factors affecting weather and general supply in Vietnam.

You need to be aware of reports produced by the USDA’s Foreign Agricultural Service, notably the bi-annual Coffee: World Markets and Trade report.  Be aware of news emanating from the International Coffee Organisation the most prominent intergovernmental coffee organization.  They provide updates on the outlook of global coffee production.

Sugar

Sugar is a major crop in the soft’s complex.  It is extracted from two notable sources.  Two main types of sugar produced are from sugarcane, which accounts for around 70% of all sugar, and sugar beet, which accounts for the remaining 30%, based on an average over 30 years.

Sugar derived from sugarcane is more popular than sugar beet.  This is because it is cheaper to produce sugar from sugarcane than sugar beet. Sugar is typically used for human consumption as food, as it is the most popular form of sweetener and also a preservative.

There are other uses for both the sugarcane and sugar beet crop.  The sugar pulp can be used for the purposes of feed for livestock. One notable use of sugar can be for the production of ethanol. Brazil is the leading producer of sugar-based ethanol.  The production of sugar for ethanol typically means that there is another reason for demand. This, in turn, may impact the sugar market, given the impact factors like this may have on supply, so it’s important for you to be aware of this.

Largest Producers, Importers & Exporters

The world’s largest producers of sugar are Brazil, China, the EU and India.  These four nations account for around half of all sugar produced in the world.  Whilst most of those nations produce sugar from sugarcane, the sugar produced in EU predominantly comes from sugar beet.

An important factor in the price of sugar in the world market is the dump market.  Brazil often produces more sugar than their domestic consumption requires.

The excess sugar produced by Brazil will make its way to the dump market, where a nation like Brazil will dump sugar onto the world market, potentially for an excessively low price.  This impacts the world market given the higher levels of supply and the downward pressure this can put on prices.

Although it is not one of the biggest producers, Thailand is one of the largest exporting nations so it is important to be aware of factors which can affect its supply.

In terms of world consumption and demand, typically, major established economies such as the EU and the US are the largest consuming nations, and regions of sugar.  However, it is important for you to take into account the effect of demand for emerging markets and economies notably India, China, and Brazil.

Also, the movement in small part, from conventional crude oil-based energy to biofuels has seen the popularity of oil alternative, like blended ethanol, increase. In terms of fundamental data sources for sugar, one of the most important for sugar is the Sugar World Markets and Trade Report, produced bi-annually by the United States Department of Agriculture.

This report provides supply and demand estimates for sugar emanating from the major producing nations namely Brazil.

Cotton

Cotton is a fiber seed, produced from the cotton plant.  Cotton fiber is separated from the cotton seed through a process called ginning.  There are a number of cotton species which are grown in different parts of the world.

Upland cotton is the species most commonly produced in the world.  Other forms include Asiatic, Egyptian, American Pima and Sea Island cotton.  From the cotton plant, cottonseed is also derived.  Cottonseed oil is edible oil processed from cottonseed.

Cotton is predominantly produced in the tropical and subtropical regions.  The major use for cotton is in textiles.  The major producers of cotton are the US, China, India and Pakistan.  These nations account for in excess of two-thirds of the world’s cotton production. Whilst the US has been the largest producer in the world, it is important to note the increase in cotton production in India, which has seen its cotton production rise to challenge the US.

This is coupled with the increase US acreage for the growth of some of the more popular grains; corn, wheat and soybeans.

Whilst the four nations mentioned are the biggest producers, however, some of these very nations themselves provide significant domestic demand for their own produce with textile factories based within these nations are buying up cotton and selling on the manufactured articles abroad, mainly to the US.

This is why it is crucial for you to be aware of some of the smaller producers who have a larger impact on the export markets, such as Uzbekistan and Brazil.  With that being said it should be noted that the United States is the largest export of cotton, with China being the largest importers of the crop.

Some of the main reports for you to look out for include the Cotton and Wool Outlook, published by the USDA’s Economic Research Service.

As is the case with all of these soft’s, the weather is an important factor which can impact heavily on supply and, as a result, price.  Adverse weather may inhibit or ruin the supply of these three, whilst good weather is likely to be conducive to increased supply.

Things to Take Away

  • You need to be fully aware of the different crops within the soft’s complex.
  • As ever, your knowledge of the nature and uses of the crops, coupled with information on the major producers and consumers, as well as the major exporters and importers is important.
  • You need to know the seasons when the crops are produced also.
  • The key reports and releases also need to be considered.