WHAT EFFECTS COFFEE PRICES

What effects coffee prices?

The drink we all know and love is not only a delicious beverage, but one of the most highly traded commodities in the world. Coffee prices have been known to fluctuate and are becoming more and more volatile. With consumption rising in producing and non-producing countries, there is a growing fear of a lack of supply to meet the growing demand. Agronomical issues like plant diseases and global warming are having a large effect on coffee crops, and therefore prices. Drug cartels are using coffee to launder money, paying higher prices than ever before. In the specialty coffee sector, biodiversity and varietal separation is raising prices for the short term, with hopeful long term benefits for producers and consumers.

At the ugly, financial side of the industry, lie big trading companies that buy and sell coffee as they would stocks on Wall Street. The majority of trades are not composed with a direct aim of buying and consuming the coffee. Where there’s a highly volatile market, there’s a high risk, high reward situation. Recently, the price of commodity coffee rose sharply due to a fear of lack of supply globally. Trading companies were further amplifying these prices by buying up future contracts, so the total ‘available’ supply diminished even further. The sad thing is that specialty coffee buyers like to buy coffee as soon as it has been processed and rested at origin. This means that they want to buy the coffee within a certain timeframe, leaving them susceptible to volatilities in the market.

The price of specialty coffee is calculated by adding the commodity coffee price and a ‘differential’ for the quality improvement. Usually, the higher the quality, the higher the differential. The differential itself is not directly effected by commodity prices but fluctuations in the commodity market still effect the end price of specialty coffee. All coffee around the world is traded in USD. This can be good and bad. Currently, the AUD is weak and the Reserve Bank of Australia wishes it to become even weaker to make our export industries more appealing to overseas clients. Unfortunately, this means that our coffee prices will be going upwards as our dollar weakens.

With population growth and a rise in coffee consumption in producing and non-producing countries, there is a sense of fear in the coffee markets. With bad rainfall in Brazil and many fear-mongering reports about the severely low harvest yields for the season, fear is heightened to new levels. The fear of a lack of supply drives large trading companies to hold their coffee stocks, which pushes prices even higher on the market as there seems to be a lack of supply. Once the critical point is reached, where these companies are happy to sell their ‘stock’, coffee prices come back down.

Climate change and plant diseases are also pushing coffee prices upwards. There has been a recent Roya (rust) outbreak in South/Central America. This is not a new disease, but it is now effecting higher altitude farms due to higher temperatures. Farmers we spoke to in Costa Rica, El Salvador, Panama and Guatemala expressed grave concern for the future of coffee farming. Some said they have lost up to 40% of their crops to Roya, while some have had relatively minor losses. Lower yields and anxiety about future crops drives farmers to put prices up to account for the extra risk.

Central American drug cartels have recently been using coffee as a money laundering tool. They buy coffee from a farmer at an extraordinarily high price. In cash, of course. They then sell the coffee on the local market at a loss. They don't mind losing a small percentage as the money is now clean. These transactions change the farmers’ expectations of prices.

Coffee prices are always going to be volatile, until weather, population and capitalism cease to exist. The coffee price at consumer level has been almost unchanged for 10 years or more. Maybe the next time you pay $4 for a caffe latte, have a think about how much work has gone into producing it and how many people are involved in making that experience great.