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  • QA 038
    Question:
    Why is coffee not sold in currencies other than the US Dollar?
    Background:
    The European Union is by far the largest coffee consumer in the world. When local currencies in coffee producing countries strengthen against a falling dollar then growers in fact do not benefit so much from rising dollar prices. What, therefore, are the possibilities of selling in currencies other than US Dollars, for example the Euro?
    Asked by:
    Grower - Tanzania
     
    Answer:

    Yes, if your local currency strengthens against a weak US dollar, then coffee export revenues will be lower. And vice versa of course… The issue is not new. 

    Of course there are many sides to this issue. However we think the four points below already make the case that, although change is always possible, for the time being it is an unlikely prospect.

    • Coffee is a global commodity that is traded worldwide on a daily basis. It would be very difficult to maintain this global liquidity if some coffees were priced in different currencies. One should remember for example that in 1992 the London Robusta market moved from using sterling to dollars for that reason, thereby also facilitating arbitrage between the US and London futures markets.
    • Price risk management would become very difficult if the market had to interpret both futures price movements, and currency movements for each and every transaction. Close to 90% of the market is mainstream coffee that is priced/hedged against the New York and London futures markets. These are priced in US currency. Using different currencies in a single transaction could mean that a correct decision on the coffee price might be totally offset by a wrong assumption on the currency front.
    • The currencies of many countries are loosely linked to the US dollar in the sense that they often follow dollar movements, particularly so in Latin America where the US is of course the dominant trading partner. This is not the case in most of Africa where the European Union plays that role.
    • Of course the US market will continue to purchase in US currency and many if not all origins will oblige. In effect this would create a two-tier market that may distort prices and add currency-based arbitrage to an already quite speculative coffee trade.

    One should also bear in mind that buyers will always protect themselves. If having to buy in a different currency means a disadvantage then this will be priced into the transaction. Or they may simply look elsewhere.

    In any event, we do not foresee the coffee trade generally moving away from the US dollar any time soon, if at all. It may be possible perhaps to come to individual arrangements with sympathetic buyers, for example in the specialty trade where some roaster margins are such that hedging is not really an issue anyway. But such cases are likely to be the exception rather than the rule.


    Posted 21 August 2005

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