World Coffee Day: Learn more about the cycles and peculiarities of this commodity
Check out an overview of this important commodity that influences the world’s cultures and economy.
Coffee is one of the most traded commodities in the world. Consumed in different ways, it’s part of the daily lives of a large part of the world’s population. There’s even a date to celebrate it: April 14 is World Coffee Day.
Coffee’s history doesn’t have exact records of its true origin, but many believe that it came first from Ethiopia in the mid-9th century. Legend has it that a local shepherd noticed that his goats became more active and happier after eating the small reddish fruits. From then on, he began making infusions, as he himself also wanted to absorb the stimulating essence.
Other stories state that a monk was frightened by the power of the bean and threw it into the fire. When he experienced the aroma released by the burning coffee, he decided to give it one more chance and prepared a drink.
Regardless of origin, Saudi Arabia is responsible for spreading coffee around the world, as the bean came to have great economic importance for the country. That’s how it reached Europe and then Brazil, which is still the world’s largest producer, followed by Vietnam, Colombia, Indonesia, and Ethiopia (the latter still plays an important role in production).
Since it’s so revered worldwide, the coffee market also has its peculiarities. Its consumption follows global behavioral trends. However, its relevance in the economy is truly remarkable.
Currently, there are two main types of coffee that are traded on reference exchanges: Arabica in New York, and Robusta in London. Considering the aggregate of the two, we have an average global production of 175 million 60-kg. bags. The average production of Robusta is 79 million bags, and that of Arabica is 96 million.
To understand this market better, we need to know how it’s consolidated.
The Coffee Market: Its waves and tendencies for the future
For a long time, coffee was produced by only a few producers around the world, who held this power over the bean and negotiated with some exporters, charging the price they wanted while obtaining high profits. But with the increase in demand, suppliers also began to seek new market practices.
To this day, coffee differs a little from other commodities, as pricing doesn’t depend only on supply and demand, but each producer can add value to the grain through its production method, location, harvest and, after roasting, market strategy and others.
In addition, today there are numerous small producers, cooperatives, family farms, and other business models. But to understand how we got to this point, we need to look at the evolution of coffee over the years and understand its waves.
1st wave: By the 1960s, consumption had begun to skyrocket. In this period, the main feature was the pattern of industrial production. Coffee was seen as a product of the industry, not coming from the farm. Its taste was bitter, and the drink was very dark and had added artificial flavors. Sales of coffee happened in large quantities to general grocery stores.
2nd wave: In the 1970s, the form of consumption began to change. Starbucks is a good representative of that moment, when the most important thing was the experience. This is how espressos, lattes, and other coffee recipes appeared, but the quality remained limited. The focus was on flavors, even if they were artificial.
3rd wave: The 2000s marked yet another change in the market, characterized by softer roasted coffees, with very specific flavors and profiles, and with origins becoming the main point for the consumer. The production chain became more transparent, and both quality and sustainability (be it environmental, social, or economic) became more vital for producers, roasters and consumers.
And the future? Our Market Intelligence Analyst, Natalia Gandoplhi, says that in the specialized market, it’s already believed that we’re entering a fourth wave. “People want to consume specialty coffees, and they’re more concerned with quality and specificities. It’s becoming a question of the work, and not of focusing on one feature or another,” Natalia says.
However, traditional coffee will never go away. Yet it’s essential to look at consumer trends to better understand market forces soon. “Although there’s growth in this market niche, the commodity characteristic of traditional coffee will remain,” Natalia concludes.
Coffee Production: How it works and what influences a good harvest
Coffee goes through many stages until it reaches the consumer’s table. In general, among them are:
- Negotiation of Inputs
- Planting & Cultivation
- Price Negotiation
- Drying & Processing
- Roasting, Blending & Grinding
Thus, it’s possible to observe how many processes and negotiations coffee goes through, and how much it affects and is affected by the economy. For example, Brazil—the largest producer of the bean, and also the second largest consumer—plays a fundamental role in this equation. When something happens in the Brazilian supply chain, there’s a large impact on the global balance, since the country represents, on average, one third of the global coffee supply.
The Market Intelligence Analyst at hEDGEpoint, Natalia Gandolphi, tells us that an example of how supply and demand dynamics can affect coffee comes directly from Brazil, due to the climate factor. “In April of 2020, we were alerted to the possibility the La Niña phenomenon happening, which, in Brazil, could affect rainfall patterns, and bring temperatures down below average in the country. In fact, there were problems with rain in 2020, and frost in 2021.”
With coffee, as it’s a perennial crop, what happens during the vegetative development also affects the production the following year. “With the Brazilian Arabica calendar, starting with the harvest around May, followed by flowering in September and October, and fruit filling and subsequent maturation between November and mid-April, we have periods during which rain is extremely necessary,” Natalia affirms.
In the last quarter of 2020, during the flowering of the 21/22 cycle, we had below-average rainfall that generated a sharp drop which was exaggerated by the negative biennial arabica crop. In the winter of 2021, we had frosts that affected the vegetative development of the 22/23 harvest. “Two years were affected by La Niña which we observed in advance in April of 2020,” Natalia emphasized in the report prepared previously by hEDGEpoint.
Due to the treatments of coffee cultures that were necessary to recover after two years of adverse weather events, plus the residual impacts that remained from these same events, the 23/24 production was also negatively affected.
Hence, with the first break of the 21/22 harvest, arabica prices in New York advanced from an average of 110 cents per pound weight in April 2020, to 150 in May 2021, at the beginning of the 21/22 harvest. With the frost, prices jumped again, reaching an average of 250 cents per pound in February 2022.
In the last quarter of 2022, Brazil recorded fantastic flowering for the 23/24 season, and prices dropped to the range of 150 cents per pound. However, with the residual impact of climate problems, flowering did not reach the ideal, and prices reacted accordingly, returning to levels of 170 cents.
In other words, looking at the last few years, we can fully understand the coffee market today. We do this through fundamental analysis, observing factors that directly affect supply and demand.
“The coffee market is directly impacted by all the movements that are happening globally, such as the climate issue, and the current banking crisis. In addition, the last few years in which we had productivity problems changed the price and spread dynamics. The expectation for the coming years is positive, but you need to always be aware of what happens to protect yourself,” Edelcio Samorano, Head of Desk at hEDGEpoint Global Markets, points out.
What’s the importance of managing risk in the coffee market?
All commodities are subject to risks that make such management essential. These range from the unpredictability of the weather, which can either hurt or help the success of crops, to exchange rates, world events that affect policies, and market changes, among others.
“Simply because it’s one of the most traded commodities in the world, this market attracts a lot of money, speculators, and investors, and with all that, the volatility increases. Thus, it’s important to have protection against market bumps. All participants must hedge—if not the product, then the exchange rate”, Edelcio emphasizes.
With so many sources of instability, this market makes it prudent to have a partner who offers specialized risk management products. hEDGEpoint specializes in hedging, combining knowledge with technology, to always offer you the best experience in futures operations.
Our team has extensive experience with and understanding of each commodity’s unique characteristics, such as coffee. Thus, we offer customized products for each business, regardless of what stage of the chain it’s related to.
Talk with a hEDGEpoint specialist today.
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