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Currency and the Price of Coffee

On Friday, 23 September, Kwasi Kwarteng, the Chancellor, delivered his mini-budget. Included in the budget were cuts on income tax, repealing the 45p tax rate on earnings over £150k, a revision on stamp duty, and a reversal on the planned corporation tax rise from 19 per cent to 25 per cent and April’s National Insurance increase. 

This new tax take is set to be around £45bn lower, a cut in revenues worth about 1.5 per cent of national income. The spurt of fiscal stimulus, coupled with Liz Truss’ energy price cap for households and businesses (which is expected to cost £60bn over the next six months alone), sparked fears that the country’s debt is heading down an unsustainable path

These events affected the pound. Soon after Kwarteng announced his plans, the British pound slid more than 3% to its lowest level against the U.S. dollar since 1985. Two days later, the pound fell almost 5% to an all-time low of 1.033, before recovering above 1.07.

Source: BBC

In October last year, I published an article looking at how changing C Market Prices and Freight affects the price of coffee. In the article, we traced how rising market and freight rates could increase the price of coffee over twelve months. Back then, the pound was sitting at a healthy 1.372 against the dollar. 

Now that the pound is at its lowest level in over fifty years against the dollar, how will coffee prices change?

Currency and Coffee Prices

Below is a graph that follows on from the coffee price example we introduced in our previous article. It shows how the purchase price for a kg of green coffee in the UK (in this case, a coffee from Colombia) might change over time. The graph includes two twelve-month periods from September 2020 to September 2022 and one two-week period covering the budget announcement this month. It highlights the significance of currency on short-term coffee prices.

Between September 2020 and September 2021, the price of our coffee jumped 35% from £4.87 to £6.61. And between September 2021 to September 2022 the price of the coffee increased a further 17% to £7.75. These increases were mainly due to C Market Price rises caused by global events. The C Market sat around 105 in 2020, 204 in 2021, and 220 in 2022.

However, our coffee’s price rose to £8.48 in the two weeks between 12 September 2022 and 26 September 2022 alone, an increase of 9.4%. The reason for this is currency.

In our example, we’ve kept the C Market price at the same level on both days in September this year – 220. Since coffee is traded on U.S. dollars, its price increases as the British pound loses value against the dollar. So, as the budget announcement on 23 September dropped the pound’s value from 1.17 to 1.07, the price of our coffee increased by £0.73p/kg.

It is worth noting that this currency relationship works in tandem with the U.S. dollar’s changing value, which is currently soaring. While a rising dollar may be seen as a negative in the U.K. as our currency falls, increasing the price of our Colombian coffee, it can also positively affect people on the other side of the supply chain. Local currencies, such as the Colombian Peso, also fluctuate in value with the dollar, meaning coffee producers may receive more or less money for their coffee depending on the currency market. Currently, Colombian producers are receiving healthy returns on the peso due to the increase in the dollar.

How can we navigate this?

Mortgage rates are threatened by the drop in value of the British pound, just as coffee is threatened by it. And just as UK homeowners scramble to lock in mortgages to increase financial security for the future, so should roasters with coffee. 

Of course, we never know how the market will change. And looking back on past events is all well and good. But planning ahead and forward contracting coffee, rather than buying spot, can create security and reliability in our roasteries and coffee ranges, making our businesses more resilient as a result.