Coffee price is like the price of any other commodity like gold and oil. There is a global market for coffee that is worth $20 Billion a year. And the price can fluctuate drastically overnight. For instance, tonight’s coffee might be selling at $10. And tomorrow, when you wake up, you can see the price rise as high as $20. One of the factors that have a significant influence on coffee price is the currency exchange rate.
Understanding The Coffee Price
To understand the price of coffee, we have to understand how coffee is treated. In the global market, coffee is treated as a commodity. Certain commodities have similar features no matter where it comes from. One example of such a commodity is oil. No matter where oil comes from, it serves the same purpose and has the same quality.
However, despite being a commodity, different coffee varieties have different taste profiles. So it is common sense that buyers will be willing to pay a higher price for better quality coffee beans. But in reality, both lower quality and higher quality coffee are traded as equal, at the same price. This price is referred to as the C Price.
Let’s break down what standards coffee is compared against when traded in the Intercontinental Exchange (ICE) in New York. In the above paragraph, we said that low-quality and high-quality coffee is treated equally. But there are some standards.
- The tradeable coffee beans have to be of Arabica species.
- They must be green. (Unroasted)
- They must be grown in any of the 20 member countries.
- The coffee will be handed over in any of the eight licensed warehouses around the globe.
As we have mentioned earlier, coffee is traded in the ICE, just like any other commodity. Its price fluctuates based on the independent speculations that each trader makes in this market. These traders do not care about how much money the farmers are getting paid and what quality coffee they are trading; they are only concerned about how much commission they are making for buying and selling in the market.
This act of coffee speculation artificially distorts the actual market demand and supply for coffee. And as a result, the price fluctuates very drastically. Furthermore, the act of buying and selling coffee as a commodity depends on how attractive it is to the traders on a particular day. For instance, if traders are more interested in selling and buying oil futures during a particular week, coffee’s overall trade will drop drastically.
Moreover, if one coffee growing country produces more coffee in a given fiscal year and makes its harvest available in the global market, the supply of coffee will increase. And if there are more sellers, the price has to be cut down to attract the buyers. This is precisely what happened back in 2019 when due to oversupply of coffee from Brazil caused a heavy price fall for coffee in the global market.
How Does Currency Fluctuations Affect Coffee Price?
When discussing coffee price fluctuations, we have to consider the Currency price and its effects on various market factors. One of the core economic principles of the open market economy is, countries will produce only those commodities at which they are best. This principle is why Germany is known for the finest Automobile industry, whereas China is famous for cheap labor and electronic equipment production.
However, despite engaging in global trade, each of these countries will prefer being paid in their currency. For example, if you are a citizen of the USA, and you want to buy a mobile from China, you will have to pay in Chinese Yen. This applies to every participant in the global coffee market. And as a result, the slightest fluctuations in the Foreign Currency Exchange results in significant fluctuations in the global coffee price.
Now the second layer of this economic principle is supply and demand. If supply is high, more buyers will have to exchange their native currency for the producer country’s currency. On the contrary, if the supply is low, the buyer will be exchanging less of its native currency for that of the producing country.
The result of this global trade is the fluctuations in the value of a currency. You will see the exchange rate for two currencies drop and rise depending on the relative demand and supply. And these fluctuations happen every day. If you ask any expert, he will tell you; the foreign exchange market is the most volatile in the world.
Do Fluctuations In The Global Market Affect Coffee Farmers?
Yes. The final price that the farmers will receive depends on the stability in the foreign exchange market and the fluctuations in the currency exchange market. However, small-scale farmers do not feel the effect of these fluctuations at all. This is because they sell their harvest to a buyer who first purchases from small-scale and household farmers and sells them later in bulk in the global market.
The fluctuations in the global coffee industry are not the only factor that affects the final price of Coffee. Large-scale coffee farms need various specialized equipment and expensive fertilizers to increase their production efficiency. In most cases, this equipment is imported from a foreign country.
The global coffee market quickly absorbs any fluctuations in the price of this equipment. In such a scenario, the farmers will increase their ask price to make their desired profit after breakeven.