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Coffee trading will get a boost in December as the new Mini Coffee contracts become trade-able electronically through the New York Board of Trade. In an effort to enhance their portfolio of products, the NYBOT's introduction of the mini coffee will also inadvertently help to mitigate the wild fluctuations that has long plagued the industry. The current Coffee "C" contracts trade a large sum of the commodity, over 37,000 pounds of it. At times in the mid 80's and 90's, a single contract was worth close to $100,000, several times the value of a contract of soybeans or corn. Unlike other agricultural commodities , however, the planting of a new coffee tree does not bear fruit for a least three years, making it difficult to quickly increase the supply, no matter how high the price of the commodity goes. This often causes many farmers to plant trees at the same time, causing an oversupply and a rapid decrease in price just a few years after a boom. This phenomenon was witnessed as recently as 1997, when poor weather patterns in Brazil caused the destruction of coffee trees and hence the price to rise to its highest point in over twenty years. Wanting to take advantage of the windfall profit of coffee growers, many farmers started planting their own trees and by 2001, supply outpaced demand by several million bags. By 2002, coffee prices had reached their lowest point in over 100 years, hitting close to $.42/lb.
With such wild fluctuations in price, speculators have often become victims of the trade and commodity brokers are often forced to sell their clients positions prematurely. The mini coffee contract, which is 1/3 the size of the current contract, will enable investors to stay in the market three times longer before getting a margin call. This may help to reduce some of the volatility in the market. The Commodity Investor is highly positive on Coffee prices in the near future (see The Emergence of Vietnam), but recommends an intelligent approach to investing, to minimize the chance of a margin call. Those with over $15,000 are probably well positioned to buy a regular coffee contract, while those who have between $5,000-$15,000 should consider purchasing the mini-coffee. Individuals with less than $5,000 to invest risk a margin call if coffee prices drop quickly in the short term. The new mini coffee contract will trade under the symbol MK. |
