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Commodity Insights
Coffee
Introduction
Coffee is also one of the most frequently traded commodities in the world.
It is not the second most traded, as is commonly thought. This is a myth.
This often repeated fact seems to derive from coffee being the second most
valuable primary export of developing countries, behind oil.
A number of more developed countries also re-export their coffee, however
statistics for this are unclear, as the coffee may be raw, or it may have been grades’. A certificate is given to each country’s coffee based on the grade
processed, which would mean it is no longer a coffee commodity. Cafés and
coffee houses are increasingly common in developed countries, especially
with the rise of large coffee chains, such as Starbucks. Chains and private
cafés account for about 40% of the market share, with 60% being sold in
supermarkets and other private retailers.
A number of different types of coffee can be traded, making it different
to many commodities, especially hard commodities. There are two main
varieties of coffee bean which are traded internationally, and these are
Arabica and Robusta. Robusta beans are sold for 70% of the price of
Arabica beans, and therefore they are more commonly traded by the “big
four” coffee companies, who purchase approximately 50% of all coffee
worldwide. These four companies are Kraft, Nestlé, Procter and Gamble,
and Sara Lee. The price disparity between the two has decreased in recent
years, as large companies began purchasing only Robusta beans, which
drove up demand and decreased demand for the Arabica variety. Despite
this, Arabica coffee is still more commonly produced. National commodity
exchanges in countries with a long history of coffee cultivation often
have many more varieties of coffee available for commodity trading. The
Ethiopia Commodity Exchange, for example, has tens of varieties available,
many of them having been developed over centuries.
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A certificate is given to each
country’s coffee based on the
grade of the beans and how
the coffee tastes.
There are also variations on price and quality depending on which country
the coffee was harvested. These are known on the exchange as ‘deliverable
of the beans and how the coffee tastes. A number of countries, such as
Mexico, Kenya and Costa Rica, are established as the ‘basis’. Countries
with a higher grade are sold at a premium, such as Costa Rican coffee, and
countries with a lower grade are sold at a discount, such as Venezuelan,
Burundi and Indian varieties.
Fundamental Facts
• The top coffee-producing countries are generally politically unstable.
These facts cannot be neglected and statistics have it that the top five
producers of coffee collectively account for more than 60% of the
world’s coffee production. Hence, geopolitical factors come top of the
list to be considered to estimate coffee industry.
• Coffee is highly sensitive to the weather conditions and does not
thrive in certain weather conditions. We can safely say rain has to fall
just about the right time and sun has to shine at right time for coffee
plants to grow properly. Farm output becomes low and hence, supplies
become a problem if climatic factors are not as expected.
• Global demand outlook defines the price of coffee.
• Fair trade coffee is slowly gaining popularity. Fair trade guarantees
coffee growers a set price prior to the harvest. This has led to more
privately negotiated deals with coffee co-ops around the world.