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  • QA 156
    Question:
    Is there a 'world price' for coffee?
    Background:
    What is the world price for coffee?
    Asked by:
    Exchange student - Ireland
    Answer:

    There is no single price because coffee is not a homogeneous product. However, broadly speaking the international coffee-pricing scene can be divided up as follows:

    • Physicals - prices for green or physical coffee;
    • Indicators - prices that track broad groups of comparable coffees;
    • Futures - that project prices forward for standard qualities;
    • Differentials - a system linking physical prices to futures prices;

    Day-to-day physical coffee prices are determined by supply and demand. Price setting criteria are mostly quality (what is the quality of a given coffee or origin), and availability (how much or how little is being offered of a particular type of coffee). This confirms that not all coffee is the same. In fact each parcel of coffee is unique with regard to its characteristics, flavour and quality and hence attracts a different price. Of course other factors play a role as well, for example market expectations, speculative actions, changes in currency exchange rates and so on. However, by grouping more or less comparable types of coffee together, average prices can be calculated and even traded…

    ICO price indicators, published daily by the International Coffee Organization in London, represent and track the four main types of coffee available in the international market: Colombian mild arabicas, Other mild arabicas, Brazilian and other natural arabicas, and Robustas. For more on this go to QA 068 in the Archive and topic 01.04.01 in the Guide.

    These indicators represent spot or cash prices, quoted for coffee that is more or less immediately available (or within a reasonable time-span). The four categories enable the ICO to calculate market prices for these four broad groups and so monitor price developments for each. In addition, using an agreed formula, the ICO publishes a Daily Composite Indicator Price that combines these four into a single price representing 'all coffee'. This probably represents the best indication of a current 'international price for coffee' - this and other price information, also historical, is freely available at www.ico.org.

    Futures prices reflect the estimated future availability and demand for coffee as a whole. Go to www.theice.com for arabica coffee futures prices in New York, and to www.euronext.com for robusta coffee futures prices in London. See sections 08.04 and 08.05 of the Guide for details of what average quality of coffee these futures markets represent. Price charts depict past price behaviour on these markets - a good source is found at www.futures.tradingcharts.com.

    However, as mentioned, the ICO Indicators (which track prices) and the futures markets (which project prices) by necessity only do so for generally known, standard qualities of coffee…

    Futures markets are used to offset price risk in the green coffee market where different qualities of coffee are traded. Traders therefore link individual prices with the futures price by establishing a price difference, the differential.  See topic 01.04.02 of the Guide for more on this but, briefly, this differential takes into account (i) differences between an individual coffee and the standard quality on which the futures market is based, (ii) the physical availability of that coffee (plentiful or tight), and (iii) the terms and conditions on which it is offered for sale. *

    The study of physical coffee prices is however complicated by the variability in the quality and appeal of individual coffees. This makes it extremely difficult to monitor the daily behaviour of differentials and physical prices. For general research purposes we will therefore always suggest to concentrate, certainly initially, on the price information available from the International Coffee Organization and the futures markets of New York and London.

    * For example, by combining the New York or London futures price and the differential, one usually obtains the FOB (free on board) price for a particular type of green coffee. This enables the market to simply quote, for example, 'Quality X from Country Y for October shipment at New York December plus 5' (US cts/lb). Traders and importers know the cost of shipping coffee from each origin to Europe, the United States, Japan or wherever, and so can easily transform 'plus 5' into a price 'landed final destination'.

    Posted 22 June 2007

     

    Related chapter(s):
    Related Q & A:
    Q&A 019, 024, 038, 068, 072, 080