Learn how coffee prices are formed
We explain the steps for setting coffee prices, highlighting the factors that impact the complex calculation of this commodity´s value.
Before that delicious cup of coffee reaches your table, there’s a long process. Many aspects affect coffee prices, such as the dollar exchange rate, global economic policies, and climatic factors.
Knowing how the value definition of this commodity works can make all the difference for market negotiators, which contributes to making well-informed decisions.
After all, coffee is one of the products in greatest demand on the planet: its global consumption is expected to reach the equivalent of 170.3 million 60-kg. bags of coffee, between October 2022 and September 2023, according to the International Coffee Organization (ICO).
Are you curious about how exactly coffee prices are formed? Keep reading to find out!
What factors influence the definition of coffee prices?
When we talk about coffee, it’s important to remember that it’s a commodity produced on a huge scale by many different producers worldwide. A chain of national and international suppliers exists, involving complex dynamics.
The cost of coffee is influenced by numerous factors. We’ll highlight the main ones below.
- Supply and Demand
The law of global supply and demand is determined by the relationship between the price of goods and services offered and the demand for them. In general, the greater the demand for coffee, the higher the price charged for it. On the other hand, the lower the demand, the lower the price. A balance is sought between the two to stabilize the value of coffee.
- International Exchanges
International exchanges are references for coffee pricing. For the price of arabica coffee, the New York Stock Exchange is the main source of prices. In the case of robusta coffee, the reference is the London Stock Exchange.
- Production Costs
- Coffee Characteristics
The characteristics of the coffee traded also directly affect the price determination. Attributes such as origin, grain size, whether it’s arabica or robusta, certifications received, and traceability all contribute to defining the value.
- Domestic and Foreign Market Stocks
Coffee stock levels lead to changes in price stability. Low inventories tend to make the market more sensitive to unforeseen events that affect supply, both locally and globally.
If stocks (national and international) increase and demand falls, prices also tend to fall about historical averages. However, if stocks are low and demand increases, then prices rise.
- Weather Conditions
Climatic conditions, such as droughts and excessive rain, have an impact on coffee production in important producing regions. The consequences of these phenomena modify supply, which contributes to more price volatility.
A clear example of this: The global deficit in the 22/23 coffee harvest occurred mainly because of the decrease in production in Brazil, the world’s largest coffee producer, due to the adverse weather.
Read how climatic phenomena impact commodity production here.
- Dollar Exchange Rate
As we mentioned, coffee is affected by international exchanges. Thus, it’s subject to the dollar exchange rate. If the dollar is high, coffee exporters are encouraged to sell more. The subsequent increase in supply tends to force prices to fall if demand doesn’t rise at the same rate as production.
- Politics and Economics at Local and Global Levels
Political and economic decisions, such as import tariffs, agricultural subsidies, and trade regulations, can all influence coffee prices. Geopolitical conflicts in coffee-producing countries may also disrupt supplies and affect prices.
- Consumer Preferences
Changes in consumer preferences for specific types of coffee, such as organic, contribute to changing prices for these specific varieties. The migration of consumption from arabica to robusta coffee also helps to explain the increase in production of the latter variety.
As we reached the end of the pandemic, people’s savings were depleted. Aid was also terminated, resulting in the deterioration in purchasing power as well as high inflation around the planet. Consumers started looking for cheaper coffee, requiring the adaptation of production to meet this demand.
Coffee Prices: Find out how this calculation basis is conducted
Coffee prices involve the interaction of complex factors, such as the quality differences in the types of coffee, which aren´t fixed and are subject to change. For you to understand better how this value calculation is carried out, let’s look at an example that uses the average differential of a 6/7 type coffee spout (related to arabica):
New York Stock Exchange: 150.00
Differential (Average): -30.00
Conversion Factor: 1.3228
Calculation: ((150 – 30) x 1.3228 x 5.0) = R$793.68
These costs also include logistical expenses and taxes for moving the coffee from the producing region to the port of shipment, and the origination of CIF and FOB prices:
- CIF (Cost, Insurance, and Freight): The seller is responsible for all costs associated with transporting the goods to the port of destination specified by the buyer. This includes the merchandise cost, the cost of shipping insurance, and the cost of shipping.
- FOB Price (Free On Board): The seller is responsible for delivering the goods to the ship (or other specified means of transport) at the port of shipment. From that point on, the responsibility and costs are assumed by the buyer, such as freight costs, transport insurance, and any other costs associated with transporting the goods from the port of shipment to the final destination.
On top of this, the values of the reference exchange, the exchange rates that relate the local currency to the dollar, and the contracted differential are all considered. This process reflects the aspects of quality, availability at origin, and appetite on the demand side.
Check out the following image for a detailed look at the relationship among the main factors involved in calculating coffee´s value:
hEDGEpoint: Protecting the coffee market
hEDGEpoint offers special hedging instruments, such as the use of derivatives, and provides tools that help protect against volatility. Combining market intelligence and data analysis, we work with a multidisciplinary team that has extensive knowledge gained from working continuously in the commodities sector.
Talk to a hEDGEpoint specialist today to learn how we can help your business.
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