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WIKI ANALYSIS
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This article describes a commodity traded on a commodities exchange. View articles referencing this commodity. |
This article is about the commodity in general. For the specific futures contract, see Coffee Futures.
World coffee exports were 7.97 million bags in July 2008, up from 8.31 million in July 2007. [1] Overall in 2008, declining output coupled with rising worldwide demand for coffee has dramatically increased the price of this commodity.[1] From August 2007 to August 2008, coffee prices have increased approximately 21%.
The biggest consumers of coffee are developed countries such as the United States, Germany, and Italy, which account for the majority of worldwide coffee imports, but on a per capita consumption basis countries such as Finland, Aruba, and Iceland lead the pack.[1] Meanwhile, in emerging markets like Brazil, Vietnam, and Colombia, coffee is a major source of revenue, with exports of coffee accounting for, in some cases, over 80% of foreign exchange earnings.[2]
Coffee is traded on major futures and commodity exchanges, most importantly in London and New York. The movements of coffee prices are largely determined by supply/demand fundamentals - if there are more sellers than buyers, the price of coffee typically falls; when there are more buyers than sellers, the price of coffee typically rises. Two types of coffee are traded on a worldwide basis, Arabica and Robusta. Robusta is typically sold for 70% of the price of Arabica, and for that reason, it is usually favored by the "Big Four" coffee roasting companies (Kraft, Nestlé, Procter & Gamble, and Sara Lee) that purchase approximately 50% of the coffee produced worldwide.[3]
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The chart at left shows spot prices for Coffee on the intercontinental exchange in cents per pound.
Which companies benefit from lower coffee prices?
All companies that sell retail coffee to consumers would stand to benefit from lower raw coffee prices. Companies' cost of goods sold would decrease and therefore, operating margins would expand. For example, in 2001 when coffee prices decreased by approximately 15%, Starbucks' gross margin increased by approximately 5%. The following companies sell coffee to consumers and would likely benefit from lower raw coffee prices in the same way:
- Starbucks (SBUX)
- Kraft Foods (KFT) - Maxwell House
- Procter & Gamble Company (PG) - Folger's
- Nestle (NSRGY)
- Sara Lee (SLE)
- Tim Hortons (THI)
- Peet's Coffee & Tea (PEET)
- Dunkin Donuts
Which companies benefit from higher coffee prices?
For the most part, there are no companies in the United States that would directly benefit from higher coffee prices since the United States is not a producer of coffee. The farmers who produce coffee (mainly in developing countries) have the most to gain from increased coffee prices since their costs would most likely stay the same and therefore, their profit would increase.
One could argue that there is an indirect benefit for companies like Deere and Co., which manufactures agricultural equipment and has a dominant market share in the agricultural equipment industry. So, if farmers gain more profit and coffee prices increase, more farmers will produce more coffee and more farmers will be able to afford new machinery/ equipment.
Who Produces Coffee?
| 10 Largest Coffee Producing Countries in 2007[5] | No. of Bags (thousands) | % of World Production |
| Brazil | 33,740 | 29% |
| Vietnam | 17,500 | 15% |
| Colombia | 12,400 | 11% |
| Indonesia | 7,000 | 6% |
| Ethiopia | 5,733 | 5% |
| India | 4,850 | 4% |
| Mexico | 4,500 | 4% |
| Guatemala | 4,000 | 3% |
| Honduras | 3,833 | 3% |
| Peru | 3,190 | 3% |
| Total | 96,746 | 82% |
| World Production | 118,074 | 100% |
Who Consumes Coffee?
| 10 Largest Coffee Consuming Countries (per capita)[6] | Units: Kg per person per year |
| Finland | 11.4 |
| Aruba | 9.2 |
| Iceland | 9.1 |
| Norway | 9 |
| Denmark | 8.1 |
| Sweden | 7.9 |
| Bermuda | 7.5 |
| Switzerland | 7.4 |
| Netherlands | 6.8 |
| Germany | 6.6 |
What factors impact coffee prices?
Weather
A major factor affecting coffee prices is weather. Weather is an uncontrollable force that can seriously damage the crop yield in any given year. So, if weather does not cooperate, farmers are not able to produce as much as demanded and once again, there is a supply/demand imbalance that leads to rising prices. As you can see from the price chart above, there was a dramatic increase in coffee prices during 2004. In 2004, demand for coffee significantly overcame the available supply of coffee partially due to the fact that Brazilian coffee fields had experienced extremely poor weather and could not produce enough coffee to meet worldwide demand. Since Brazil accounts for 29% of coffee production, a decrease in production in Brazil leads to a significant lack of supply.[7]
Supply and Demand Fundamentals
Coffee prices are largely determined by supply/demand fundamentals, and to a slight degree, speculative actions. So, coffee prices generally increase when demand exceeds supply and they generally decrease when supply exceeds demand. For example, if the world-wide coffee crop yield decreased for any given year to an amount less than the demand from world-wide coffee retailers then coffee prices would likely increase as the availability of coffee would be less and people would be willing to pay a higher price if there was a strong enough demand for coffee.
Arabica vs. Robusta
The price disparity between Arabica and Robusta used to be much larger than it is today due to the fact that the largest roasting companies began to solely purchase Robusta which, drove Robusta demand up. As a result, Robusta prices increased while demand for Arabica decreased causing Arabica prices to fall. Since Arabica coffee is produced in greater quantities than Robusta, the average price of coffee fell precipitously leading to lower profits for farmers in developing countries. Since coffee is a perennial product, it takes a good deal of time to switch from one type of coffee to another. This created a worldwide coffee crisis because farmers literally could not afford to produce any more as their margins narrowed and essentially, disappeared. In 2007 and 2008, farmers have begun to adjust to the new market demand and focused more of their resources on Robusta. Even so, over the past ten years, the spread between Arabica and Robusta prices has continued to decline.[8]
Coffee Futures Contracts
References
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