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Coffee and cocoa markets are especially exposed to algorithmic trading

A significant shift is occurring in the commodities world, with markets such as cocoa and coffee being targeted by short-term investors using computer-driven algorithmic trading to boost ROI.

According to reports, this movement is threatening to divorce the coffee market from the fundamentals of supply and demand, resulting in volatile price fluctuations.

Algo-trading has the potential to deliver particularly bad news for the coffee industry, as volatile intra-day trading would likely catch producers, roasters and retailers off guard with sudden price changes. Ultimately, this may lead to increased price volatility for the consumer.

One way to mitigate the negative impact of algorithmic trading on the coffee industry is the adoption of a different business model that bypasses the international commodity markets.

We have extensive first-hand experience of this through our own Union Direct Trade which, at its heart, is about developing close and long-lasting relationships with farmers in coffee growing communities. Union Direct Trade is about forging a direct link between the value of the crop and the price it commands.

This alternative trading model not only stops the pervasive effects of algo-trading, but also helps farmers increase the yield and value of their crops. In return, UK consumers gain access to progressively better-quality coffee – a win-win!

However, there are challenges that will need to be addressed. One key factor is the scalability of this trading model, especially outside the realm of speciality coffee. But with consumers more focused than ever on where their food and drink comes from, finding ways to scale these trading models will ultimately be inspired by consumer demand.

Algo-trading is a fundamental change to the way commodities are traded and its impact is only set to grow as more traders get on board. It is in all of our interests to find ways to preserve and strengthen that crucial link between cost of production, quality and price. Union Direct Trade is about creating value throughout the supply chain.

Violeta Stevens is MD of Union Hand-Roasted Coffee