Why do coffee prices change? Part 1 of 2
Over the next two articles we'll be discussing some of the factors that impact the price of coffee. In this article, we'll look at futures, currency fluctuations, rising demand, and transportation costs.
It’s an unpleasant surprise when a coffee you’ve been buying for a while suddenly jumps in price. There are a number of factors that contribute to a coffee’s price, and if one or more changes, it can cause the coffee’s price to rise or fall.
The main elements that can make this happen include:
Local Economic and Political Environment
Consumer Trends - Taste
In this and the next blog, we'll be talking a little about how each factor has an impact on pricing.
The futures market is the single biggest driver of price, and its impact is felt by everyone in the industry to varying degrees, from producers - all the way through to consumers.
A ‘futures contract’ (informally known as ‘futures’) is a legal contract agreeing to either buy or sell something in the future, at the price stipulated in the contract. Coffee is one of many soft commodities traded on the New York Futures Exchange.
The Futures exchange price for coffee (the price placed on world coffee at any given time) is based on ‘Grade C’ coffee. ‘Grade C’ coffee is considered to be the average coffee quality in the world. If a coffee is of better-quality than Grade C, it’ll earn a premium. If it’s of lesser quality, it’ll be discounted.
The following factors all have an effect on the Futures exchange rate for coffee
The currency most widely used in arabica coffee trading is the US dollar ($USD). To buy coffee for exporting to Australia, we have to exchange Australian Dollars ($AUD) for $USD. The exchange rate fluctuates on a daily basis.
If the $AUD becomes more valuable against the $USD (i.e. more cents to the dollar) the coffee will become cheaper. If the value of the $AUD drops against the USD (less cents to the dollar) the coffee will become more expensive. This can result in significant price increases or decreases for the coffee.
The currency of the country of origin also effects the price of coffee. The currency status of the producing country can influence the Futures exchange price according to the availability of coffee.
If the Brazilian Real (BRL) for example is performing weakly against the $USD, farmers at origin are more willing to sell their coffee overseas on the open market, as they will receive more BRL for every $USD. When the BRL is more valuable against the $USD, farmers tend to be more willing to sell to the domestic market, as it may be more profitable there than in the export market.
Recent statistics indicate that global demand for coffee has been significantly increasing for the last 15 years, and that it shows no signs of slowing. Consumption rates are increasing across the board, including – significantly - in coffee producing nations.
As an example, Brazil has the largest domestic consumption of the major coffee-producing nation in terms of volume. More locally-grown coffee consumed in Brazil means less Brazilian coffee is available for export, and less is available on the global market.
The Futures exchange price for world coffee will increase when there is less coffee on the world market, but a consistent or growing demand for it.
Much of the world’s coffee is grown in developing countries, often in remote locations with poor roads and infrastructure. The further the coffee must travel, the more expensive the transport component becomes.
This is a direct result of the combined total of fuel costs, wages, and premiums paid to reduce the likelihood of theft or damage along the journey.
In the next blog, we'll be looking at the effect local economic and political environments, climate, certifications and consumer trends have on pricing.