How a Coffee Producers use Futures Contracts to Hedge a Deal with an Australian Coffee Roaster
Imagine being a coffee producer, working tirelessly to grow a high-quality product, only to have your income threatened by unpredictable market swings. That’s the challenge Ana faces every day as she tends to her coffee farm in Minas Gerais, Brazil. But Ana isn’t leaving her future to chance. By using futures contracts, she’s found a way to secure stability in a volatile market. Her story will show you how producers like her protect their income and build resilience in the face of global uncertainties. If you’ve ever wondered how your suppliers manage risk to ensure the coffee you roast is always available, Ana’s story is where it begins.
Ana, a coffee producer in Minas Gerais, Brazil, is navigating the challenges of the 2025 coffee season. This year has been particularly tough due to extreme weather conditions, including droughts and heatwaves, which have significantly impacted Brazil's coffee production. Despite these hurdles, Ana has secured an export deal with an Australian coffee roaster to ship one container of Arabica coffee in July 2025.
However, the agreed price will be determined at the time of shipment, exposing Ana to the risk of falling market prices. To mitigate this risk, Ana decides to hedge her position using coffee futures contracts on the ICE Coffee "C" market.
On January 6, 2025, Ana reviews the latest futures prices from the ICE Coffee "C" market:
March 2025 (KCH25): 318.65 c/lb
May 2025 (KCK25): 314.90 c/lb
July 2025 (KCN25): 309.10 c/lb
Given her shipment schedule, Ana focuses on the July 2025 contract, which is priced at $309.10 per pound. This price is reasonable for covering her costs, even in the face of rising production expenses caused by adverse weather and a stronger Brazilian real.
Hedging Strategy
To protect herself, Ana sells one July 2025 Coffee "C" futures contract. Each contract represents 37,500 pounds of coffee, which aligns with the size of the container she plans to ship. By locking in this price through the futures market, Ana secures her income regardless of future price fluctuations.
By July 2025, the global coffee market faces further declines due to reports of increased production from other regions. The spot price of Arabica coffee drops to 290 cents per pound.
However, Ana’s futures hedge works as planned:
The Sale to the Roaster: Ana sells her coffee to the Australian roaster at the spot price of 290 cents per pound.
Futures Profit: Ana closes her futures contract by buying it back at the spot price of 290 c/lb Since she initially sold the contract at 309.10 c/lb, she makes a profit of 19.10 cents per pound from the futures trade.
This combination ensures that Ana effectively receives 309.10 cents per pound for her coffee, protecting her from the lower spot price.
Ana’s decision to use futures aligns with the ICE Coffee "C" rules, which specify standardized contracts for Arabica coffee. These contracts offer a reliable way for producers to hedge against price volatility, particularly in years like 2025 when weather conditions and market uncertainty dominate.
This strategy benefits both Ana and the Australian roaster:
For Ana: Futures contracts provide price certainty, enabling her to manage costs, pay her workers, and reinvest in her farm.
For the Roaster: The roaster secures a supply of high-quality Brazilian coffee, even amidst global price fluctuations.
In a year marked by extreme climate challenges and market uncertainty, Ana’s proactive use of coffee futures demonstrates how small-scale producers can leverage financial tools to stabilize their business. By effectively managing her risks, Ana not only safeguards her farm’s future but also strengthens her reputation as a reliable supplier for international buyers.
How David, an Australian Coffee Roaster, uses a Call Option Contract to Secure Coffee from a Brazilian Producer
Now let’s switch perspectives. Imagine you’re David, a coffee roaster in Australia, passionate about delivering the perfect blend to your customers. Your business depends on sourcing premium coffee at predictable costs, but global markets are anything but stable. That’s where hedging comes in. Building on Ana’s story, David’s experience reveals how roasters can use financial strategies to secure their supply while benefiting from favourable market conditions. Together, Ana and David’s journeys will give you a comprehensive understanding of how coffee futures work for everyone in the supply chain.
In 2025, David, an Australian coffee roaster known for his specialty blends, faces a challenging global coffee market. Prices are highly volatile due to extreme weather conditions in Brazil, the world's largest coffee producer. To maintain a consistent supply of high-quality Arabica beans and protect his profit margins, David engages in a strategic deal with Ana, a coffee producer from Minas Gerais, Brazil.
Ana has agreed to ship one container of Arabica coffee in July 2025. However, given the unpredictability of coffee prices, David decides to hedge against the risk of rising prices by using a Call Option as a hedging tool.
In January 2025, David carefully analyses the ICE Coffee "C" futures market:
March 2025 (KCH25): 318.65 c/lb
May 2025 (KCK25): 314.90 c/lb
July 2025 (KCN25): 309.10 c/lb
Since Ana’s shipment aligns with the July 2025 contract, David focuses on this contract, priced at 309.10 cents per pound. This price ensures both stability and affordability for his operations amidst the current volatility in coffee prices.
Hedging Strategy
To protect against rising prices, David purchases a Call Option on the July 2025 Coffee "C" futures contract. This option gives him the right, but not the obligation, to buy coffee at 309.10 cents per pound if prices rise above this level. The contract represents 37,500 pounds of coffee, matching the quantity Ana will supply.
As July 2025 approaches, global coffee prices begin to decline due to reports of increased production from other regions. The spot price for Arabica coffee drops to 290 cents per pound.
Since David purchased a Call Option, he does not exercise it because the market price is lower than the strike price of 309.10 c/lb. Instead, he benefits from the falling market price:
The Purchase from Ana: David buys the coffee from Ana at the lower spot price of 290 cents per pound.
No Exercise of Call: Because the spot price is below the call’s strike price, David lets the option expire, incurring only the cost of the premium paid for the Call Option.
This strategy allows David to take advantage of the falling market price while ensuring protection in case prices had risen above 309.10 c/lb.
David’s decision to use a Call Option aligns with ICE Coffee "C" rules, which provide standardized contracts for Arabica coffee. This tool enables buyers like David to manage the risk of price increases while retaining the flexibility to benefit from price declines.
This strategy benefits both David and Ana:
For David: The Call Option provides a safety net against price increases, while the lower spot price reduces his overall costs.
For Ana: Ana sells her coffee at the agreed market rate and benefits from her own risk management strategies, such as selling futures.
The Bigger Picture: Managing Risk Together
Ana’s and David’s stories highlight the interdependence of coffee producers and roasters in managing market risks. For Ana, futures contracts provide price stability in a volatile market, allowing her to focus on producing high-quality coffee. For David, the Call Option offers protection against price spikes while enabling him to benefit from falling prices.
Together, these strategies show how financial tools like futures contracts and options can foster resilient supply chains and strong partnerships. Coffee roasters and producers can use these tools to navigate market uncertainties, ensuring sustainability and success in the global coffee industry.
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