How much is a cup of coffee? Take a look at the board behind the barista and all will be revealed. But how much is a 60kg bag of fresh green coffee beans? That’s a whole lot more complicated.
Here at DR Wakefield, we put our experience in trading green coffee to bring keenly priced, high quality beans to the market whilst also paying the fair prices that ensure growers can continue to grow.
Let’s take a look at the many factors that have to be considered when pricing coffee.
The New York Futures Exchange
The New York Futures Exchange hosts the exchange of Coffee Futures. These form the basis for which almost all coffees are traded – apart from Robusta, which has its own market in London. The Futures exchange rate is based on ‘Grade C’ coffee, which is considered to be a midpoint for Arabica quality and therefore price. Coffees deemed higher quality than this average earn a premium; inferior ones trade at a discounted price. These margins are known as ‘differentials’, and set the rates traders negotiate and sell coffee at.
Higher quality coffees
The third wave of coffee has seen increasing demand for higher-quality varietals and rare origins. Varietals such as Geisha (popular with award-winning baristas) and Laurina (the naturally low caffeine Arabica) can attract a considerable premium compared to NYC’s Grade C or the ICO’s four groups. Similarly, coffee from small producing nations, such as Jamaica and Hawaii, are seen as rare and therefore command higher prices.
Many of the green beans purchased by DR Wakefield are certified in some way, be it Rainforest Alliance certification or Fairtrade. The Rainforest Alliance makes certain demands of the grower to encourage sustainability and protect habitats. This imposes increased financial burdens and therefore pushes up the purchase price. Fairtrade, on the other hand, puts the onus on the buyer to pay at least the globally agreed minimum to their suppliers. Organic certification is also increasingly popular among consumers. Due to additional growing costs (often demonstrated with lower crop yields) a 30ct/lb premium is commanded to trade organic coffee.
Since the mid-90s, global demand for coffee has increased by 40% and is expected to rise by a further 25% in the next five years, hitting 175.8 million bags per annum. This is driven in part by a massive demand in China, which has seen coffee consumption rise by 16% per year for the last ten years as a result of rapid urbanisation and a growing middle class. Even traditional coffee-producing nations in Latin America and Asia are now consuming more of their own product as affluence increases and global coffee culture takes hold. IN terms of volume alone, Brazil has the largest domestic consumption of any coffee producing nation; which in this coming season is likely to impact the amount of coffees available for export. As a percentage of production, Ethiopia on the other hand consumes even more with almost half of the coffee it produces.
Whilst the coffee farmer will do his best to raise a healthy and bountiful crop, he is ultimately at the mercy of mother nature. Unusual weather, be it abnormal temperature fluctuations or unusually dry or wet spells, have an effect on the quality and quantity of bean harvests. A drought in Brazil in 2014 saw the price of global coffee futures double, for instance.
Continuing climate change is likely to significantly impact Arabica coffee production in the coming decades, with rising temperatures leading to an increase in coffee leaf rust. Climate change is also reducing the amount of land suitable for coffee growing, with two thirds of African growing areas likely to be ‘unviable’ by the end of the century. Combined with rising demand, this will almost certainly lead to an increase in prices.
The Brexit referendum vote in June 2016 served as a lesson on the impact of currency fluctuation, with the pound losing over 10% of its value against the dollar. Prior to this, the pound had been relatively steady against the dollar for some time, but the same cannot be said of many of the currencies in the coffee belt.
Despite being one of the most developed coffee producing nations, Brazil has felt the effect of currency fluctuation most dramatically due in no small part to its troubled economy. Since 2012, the value of the Brazilian Real has more than halved against the dollar. This actually resulted in coffee exports from Brazil becoming more attractive and did much to lessen the impact of rising prices in the Brazilian market, caused by the 2014 drought.
Local economics and politics
As well as fluctuating currencies, certain countries in the coffee belt have a history of volatile economies and unstable regimes. Colombia, South America’s second largest coffee producer, has been in the thrall of localised conflict for over forty years. Prior to the FARC ceasefire announced in June 2016, coffee production was periodically impacted by the conflict, with FARC seeing high levels of support amongst agrarian citizens.
Kenya, one of Africa’s biggest coffee producers, is currently experiencing political unrest in the run up to elections in 2017. This too may have an impact on coffee exports in the coming months.
Irrespective of where the coffee is grown, it is going to have to travel some distance to reach its largest markets. As it happens, global shipping costs are particularly low right now (July 2016), due to lower fuel prices and some over-capacity. However, shipping green coffee beans is not a simple matter, with the arrangement of bags in the container and even the position of the container on the ship having the potential to ruin a good batch of beans if not considered carefully. As coffee is also very attractive to thieves, it sometimes necessary to pay a premium for shipping to ensure beans reach their desired destination.
Take a look at the DR Wakefield blog to find out more about how we trade coffee to bring you the finest green beans.