Beginners Guide to the Coffee Trade
How is Coffee Produced,
Who’s Producing It
What Drives the Price of Coffee?
Why is Coffee Valuable?
Coffee is a soft commodity derived from a plant that grows mostly in subtropical and tropical climates. The beverage produced from the cherries on these plants is a primary source of caffeine in diets in both emerging and developed countries.
Coffee is such an important dietary staple across the world that it has spawned a staggeringly large economy of its own. Coffee roasters, packers, growers, marketers and coffee equipment manufacturers depend on the commodity as do dairy producers and restaurant operators. Coffee commodity prices, therefore, play a vital role in the global economy.
How is Coffee Produced?
Coffee plants grow in two varieties – Arabica and Robusta. The cherry that grows on the plant contains seeds – known as beans – that are roasted to make coffee. Arabica plants grow in subtropical and tropical climates in both lower and higher altitudes:
Lower Altitude Crops: These crops require well-defined rainy and dry seasons and altitudes of between 1,800 and 3,600 feet. Such conditions produce distinct growing and maturation seasons. Mexico, Jamaica, some areas of Brazil and Zimbabwe are countries with these types of conditions.
Higher Altitude Crops: These crops grow near the equator at altitudes of 3,600 to 6,300 feet. Coffee plants here require frequent rainfall and produce two harvesting seasons. Kenya, Colombia and Ethiopia are countries with these climate and geographical conditions.
Robusta plants generally grow at much lower altitudes than Arabica crops. Coffee producers plant Robusta in regions 10 degrees north or south of the equator at altitudes ranging from sea level to 3,000 feet. Robusta plants can tolerate warmer weather than Arabica plants.
Global production of coffee is measured in jute bags which can hold 60 kg of coffee. *One-ton polypropylene super-sacks have been replacing jute bags for coffee exports.
- Total global production of coffee by exporting countries exceeds 150 million jute bags annually. Arabica beans generally comprise more than 60% of the total production.Over 50 countries produce coffee, but the overwhelming majority of the crop grows in ten countries:
- Brazil – for the total of 2,595,000 Metric Tons per Year
- Vietnam – for the total of 1,650,000 Metric Tons per Year
- Colombia – for the total of 810,000 Metric Tons per Year
- Indonesia – for the total of 660,000 Metric Tons per Year
- Ethiopia – for the total of 384,000 Metric Tons per Year
- Honduras – for the total of 348,000 Metric Tons per Year
- India – for the total of 348,000 Metric Tons per Year
- Uganda – for the total of 288,000 Metric Tons per Year
- Mexico – for the total of 234,000 Metric Tons per Year
- Guatemala – for the total of 204,000 Metric Tons per Year
The largest importers of coffee include the European Union, the United States, Japan and Russia. Exporting countries consume about one-third of the more than 150 million jute bags consumed annually.
Brazil is the largest consumer among the exporting countries. In the United States alone the economic impact of coffee exceeds $225 billion and accounts for more than 1.6% of the country’s GDP. The coffee industry produces an estimated 1.7 million US jobs.
Coffee drinkers enjoy many benefits. The caffeine in the beverage is credited with relieving fatigue and increasing mental alertness.
In addition, the medical community recognizes other benefits from coffee consumption: Research suggests drinking more than three cups of coffee daily may reduce colorectal cancers
- Coffee consumption can alleviate dizziness caused by low blood pressure
- Coffee consumption can delay or prevent the onset of Parkinson’s disease
- Research shows consuming more than 400 mg of caffeine daily can prevent gallstones
- Coffee consumption significantly reduces the risk of developing type 2 diabetes
What Drives the Price of Coffee?
- Discretionary Income
- Transportation and Oil Prices
- Health Issues
The top five coffee-producing countries account for about two-thirds of global production, and the two largest producers – Brazil and Vietnam – often account for about half of annual production. All of these countries have histories of political instability. Political crises such as leadership vacuums or corruption scandals can unnerve markets and create concerns about supply disruptions.
Coffee crops are highly sensitive to weather conditions. Crops need the right combination of rainfall and sunshine to yield maximum output. When these conditions don’t materialize, supply becomes restrained and prices rise. The fact that the bulk of coffee production is concentrated in a few countries exacerbates this problem. Global warming patterns have the potential to create long-term drought conditions in coffee-growing countries. If these patterns persist, coffee prices could head higher in the years ahead.
Although much of the world regularly consumes coffee, the beverage is not a necessary staple in the same way that grains such as wheat and rice are. Therefore, patterns in discretionary income and spending can play a significant role in moving prices.
In developed regions such as the EU and the United States, trends in unemployment and average hourly earnings could serve as important barometers for changes in coffee consumption. In emerging markets, overall economic growth could impact coffee consumption. China, for example, has shown a pattern of shifting toward Western dietary norms as its economy has matured. Although China has more tea than coffee drinkers, coffee may rival tea in the years ahead.
Transportation and Oil Prices
Coffee growers have to transport their beans to consumers and businesses around the world, and all forms of transportation require fuel. The price of oil can have a major impact
on the price of coffee. Disruptions to refinery operations can cause the price of gasoline to rise. Buyers of coffee should expect prices for the commodity to have a positive relationship with energy prices.
The medical community has produced conflicting evidence about the health effects of drinking coffee. Coffee enthusiasts note the beverage’s benefits for disease prevention and its numerous antioxidants including vitamins B2 (riboflavin), B5 (pantothenic acid) and B1 (thiamin). However, caffeine in coffee can lead to anxiety and disrupt sleep in some people. It also is an addictive substance.
The extent to which the public embraces the positive or negative message about coffee could impact demand and prices for the commodity.
The US Dollar Commodities, including coffee, are priced in US dollars. Sellers of coffee receive fewer dollars for their product when the US currency is strong and more dollars when the currency is weak. A strong US dollar can potentially depress coffee prices, while a weak US dollar is usually good for prices.