Coffee prices... like bank interest and petrol.

[Dolcimelo]

Re: Coffee prices... like bank interest and petrol

Can some knowledgeable person please explain to the rest of us how commodity coffee prices affect specialty coffee prices? Also, with the rising value of the $AUS, shouldnt this put downward pressure on prices? Id also be very interested to know how exposed farmers are to this kind of speculation. I think we probably all have an interest in these questions.

Thanks,
matt

[Andy]

Re: Coffee prices... like bank interest and petrol

It’s not something that is easily explained in a couple of lines of text but here goes...

Nearly all coffee including specialty coffee pricing is based off the two coffee market indexes.  Arabica is based off the New York Board of Trade - NYBOT (or now under the banner of Intercontinental Exchange, ICE) and Robusta off the London Commodities Exchange -LCE.

High quality specialty coffee is bought and sold at a premium over the current market pricing, and rubbish coffee is bought and sold at a premium under the current market price.

Bean price movements affect the futures pricing of the beans, most coffee is traded before the crops have even produced a cherry so traders speculate on what a articular grade of coffee will be worth in the future and make an offer to suit.  Often their offers are based on the number of points above the actual future price for specialty coffee.

Eg: a crop due for harvest in June might be offered at 30 points above NYC.  Today at 160 that would be a 190 price, high but manageable.  If the price in June is 220 and the buyer was contracted for 100 ton at 30 points above then the price would be 250 and the buyer had to pay 30% more for the coffee than he wanted to.  The buyer then has to sell the coffee locally, and has to raise the price to cover the difference.  

As for the AU$... it has risen with the C-index but is has now settled its climb at < US$0.95 while the C-index continues to rise. We should have copped price hikes a couple of months ago but the strong AU$ sheltered us from it... but alas, no longer.

Farmer exposure?  Very high!  The biggest problem is that if prices go too high the volume goes down (as seen in the initial post image) and while the farmers appear to be getting a great price they wont get the same volume of new orders until buyers know they can sell it at a higher price.  

Like more traditional stock exchange movements the whole chain suffers during turbulance and business goes back to normal when there is some predictability in the price.

Did that help answer the pile o questions Matt?

[Dolcimelo]

Re: Coffee prices... like bank interest and petrol

Did that help answer the pile o questions Matt?

Indeed it did, Andy, thanks! Of course, answers always generate more questions...

It just seems an incredibly bad position for farmers, who are basically victims of the market. Is it possible for producers of specialty coffee to trade outside the commodities market altogether, but without relying on exclusive arrangements with individual importers (like particular roasters, who might guarantee to buy their whole crop)? In other words, can they negotiate prices with brokers or whoever they choose without reference to the commodities price. Wouldnt this also be beneficial to roasters by being based more on quality than market roller coasters? I might not have understood it correctly.

matt
p.s. whatever the future cost, that CS Espresso Wow I just got was...wow!

[lochness]

Re: Coffee prices... like bank interest and petrol

While at the Celebrate The Bean last weekend I went to one of the talks/presentations in the upstairs rooms by a guy (I fogrget his name) from ARC whos business is trading coffee beans on the world market and particular into the Australian market.

It was very interesting and there was lots of information. In addition to the factors Andy mentions above, the guy from ARC showed graphs of the prices over recent months and discussed another major factor in the often large and sudden swings in coffee bean prices. Super Funds.... he was saying how Super Funds around the world now are the largest single group of investors and when they decide that things like gold and currency are at the top of the cycle and not going any further, or at risk of the bottom falling out quickly, then they pull LOTS of money out of those things, and dump it into commodities, including coffee. This large and sudden influx of funds can and does push the coffee prices up very quickly (days sometimes) by 30-40-50 points. The graphs he showed were dramatic also in the way the price drops again after these short spikes, literally overnight, when these investment funds decide its safe and/or profitable to go back to gold and currency.

[Andy]

Re: Coffee prices... like bank interest and petrol

True Tim, and like other stocks, the rise in price attracts other investors and the price continues to climb... until they all realise no one can trade beans at those silly prices and the price slides down again with investors jumping off the roller coaster.

Maybe if we all spread a rumour about cocoa prices we could move some of this new money out of coffee?

It just seems an incredibly bad position for farmers, who are basically victims of the market.

The same market the helps them can also hurt them... thats the reality of trading markets.

Is it possible for producers of specialty coffee to trade outside the commodities market altogether, but without relying on exclusive arrangements with individual importers (like particular roasters, who might guarantee to buy their whole crop)?

Most of the specialty coffee market is done outside the market, but still based on market pricing (well pricing above market prices).

Some competition coffee (eg: CoE) is just an auction scenario where the prices paid have very little to do with market pricing and more to do with scores on a cupping scale.

My advice to farmers is produce the worlds best coffees and you will be sheltered from the market prices!

p.s. whatever the future cost, that CS Espresso Wow I just got was...wow!

Excellent to hear, thanks (we think so too!)


PS: did you hear that coffee prices are about to crash and that cocoa is going to go break all records this year?

[Dolcimelo]

Re: Coffee prices... like bank interest and petrol

Most of the specialty coffee market is done outside the market, but still based on market pricing (well pricing above market prices)...[snip]...My advice to farmers is produce the worlds best coffees and you will be sheltered from the market prices!

I still find it a bit hard to understand how prices for specialty coffee are both based on (commodity) market prices and yet "sheltered" from them because of quality (basically, I guess I just dont understand markets). However, I can see that we still need commodity coffee; if every farmer produced specialty coffee, the price for most would be as low as commodity coffee is now. Hooray for Vietnamese robusta!

p.s. whatever the future cost, that CS Espresso Wow I just got was...wow!

Excellent to hear, thanks (we think so too!)

And, of course, getting even better by the day!

Well, Im off to invest my life savings in cocoa, as I hear from reputable sources that the price is about to go through the roof...

matt

[Andy]

Re: Coffee prices... like bank interest and petrol


After you put your life savings into cocoa the coffee bump headed south...
...and just like bank interest and petrol dont expect street prices to be corrected as quickly as they rose.

[Dolcimelo]

Re: Coffee prices... like bank interest and petrol

Well, its nice to know that I had such a large impact! Now, can you show me a graph of cocoa prices? When Im rich Ill buy you a finca...

matt

[Javaphile]

Re: Coffee prices... like bank interest and petrol

Hhhmmm....It appears to be very closely tied to the value of the US Dollar.


Java "Surprise, surprise!" phile

[askthecoffeeguy]

Re: Coffee prices... like bank interest and petrol

it seems inevitable to me that cocoa prices will also experience a rapid escalation based upon market trends

sounds like a good commodity to invest in?

p