Coffee Price

The word ‘coffee’ has different meanings in different contexts. For example, ‘coffee’ refers to the seed of the coffee plant, the pit inside the fruit of the coffee plant, commonly referred to as coffee cherries.

 

Quick Overview of Coffee

✔️Describing coffee
✔️The history of coffee
✔️The production of coffee
Trading coffee as a commodity
Factors driving the price of coffee as a commodity
The uses of coffee

 

Describing coffee

The term ‘coffee’

Coffee most commonly refers to the drink (beverage) prepared from the ground and roasted beans of the coffee plant. Besides tea, it is regarded as one of the most popular beverages in the world.

Coffee seeds are usually called coffee beans because of their shape. Although, strictly speaking, coffee beans are not actually beans.

The term ‘coffee’ is also used to describe the evergreen coffee plants (shrubs) that grow mainly in tropical and subtropical regions.

Furthermore, the term ‘coffee’ refers to an agricultural commodity traded on the commodity markets. It is considered one of the most profitable soft commodities.

 

In botanical terms

The coffee plant belongs to the genus Coffea. Botanists estimate that there are approximately between 25 and 100 species of coffee plants. The two main species used in coffee production are Coffea arabica, commonly known as Arabica, and Coffea canephora commonly referred to as Robusta.

The genus was first described in the eighteenth century by Carolus Linneaus, the Swedish botanist.

 

Features of the coffee tree/plant

Coffee plants can grow to more than 9 metres high. Hence, they are pruned to ’conserve their energy and aid in harvesting,’ according to the National Coffee Association USA.

Coffee trees prefer rich soil, mild temperatures, shaded sun, and frequent rain.

Each plant is covered with green waxy leaves that grow opposite each other in pairs. Coffee plants have white flowers that create coffee fruits (coffee cherries), growing along the branches. The coffee cherry is a small round fruit that, depending on the variety and region in which the plants are cultivated, appears greyish-green or yellow-green at first. It changes to a yellow or red cherry-like colour when ripe.

Coffee cherries grow in a continuous cycle, allowing flowers, green fruit, and ripe fruit to grow simultaneously on a single tree. Furthermore, the coffee plant is self-pollinating which implies that the coffee flowers do not need bees to pollinate.

The coffee cherry contains caffeine and has a high level of antioxidants.

The National Coffee Association USA explains that it takes approximately a year for a coffee cherry to mature after first flowering, and about five years of growth to reach full fruit production.

A coffee cherry (fruit) usually contains two seeds (beans), which are covered separately by a thin membrane, called spermoderm in biological terms but commonly referred to as the silver skin in the coffee industry. The beans are protected by the fruit as they grow and developed by deterring insects that could prevent the development of the seeds.

However, it is estimated that there is only one bean (seed) inside the coffee cherry in about 5 percent of the world’s coffee. This is a natural mutation and is called a peaberry. Some producers consider peaberries to be sweeter and more flavourful than standard coffee beans (seeds), hence, they are sometimes manually sorted out for special sales.

Coffee plants generally produce the most fruit between the ages of seven and twenty years. On average, a coffee tree produces 10 pounds (about 4.54 kilograms) of coffee cherries per year.

 

Differences between the Arabica and Robusta varieties

• Robusta beans tend to be slightly rounder and smaller than the Arabica beans which are flatter and more elongated.
• The Robusta plant is hardier and more resistant to diseases and parasites.
• Arabica is considered more flavourful and aromatic than Robusta.
• Robusta contains about 50 to 60 percent more caffeine than Arabica.
• Arabica coffee plants prefer a cool subtropical climate and grow between 610 to 1 830 metres (2 000 to 6 000 feet) above sea level. Contrarily, the Robusta variety is able to withstand warmer climates, preferring temperatures between 23.89 and 29.44 degrees Celsius (75- and 85 degrees Fahrenheit). It is able to grow at lower altitudes, from sea level to 610 metres (2 000 feet).

 

The history of coffee

The discovery of coffee is unknown, although, there are various stories describing its origin. Possibly, the favourite story is about Kaldi, a goatherd from the Ethiopian plateau. One of the versions of the legend is that Kaldi apparently noticed that after devouring the berries of a certain tree, his goats became so energetic that they did not want to sleep at night.

Kaldi informed the abbot of the local monastery of his findings. The abbot subsequently prepared a drink with the berries and experienced that the drink kept him awake through a long evening prayer. The abbot shared his discovery with his brothers at the monastery, causing information about the energising berries to spread.

The following chronology describing the spreading of coffee is mainly based on information obtained from the National Coffee Association USA.

 

• Reaching the Arabian Peninsula

The exciting news about the tree with the energising berries spread east, reaching the Arabian Peninsula where coffee cultivation started in the Yemeni district of Arabia in the fifteenth century. By the sixteenth century, coffee was known in Egypt, Syria, Persia (currently Iran), and Turkey.

The drink was enjoyed in homes and in many public coffee houses in cities.

It is believed that the word ‘coffee’ originates from the Ottoman-Turkish ‘kahve’ which derived from the Arabic ‘qahwah,’ originally referring to a type of wine.

Muslims, who are prohibited to drink alcohol, started to drink coffee in the place of alcohol and called it ‘wine of Araby.’ With countless Muslims from all over the world visiting Mecca yearly, information on the ‘wine of Araby’ began to spread quickly.

 

• Arriving in Europe

Visitors from Europe to the Middle East brought back stories of an uncommon dark black drink, and by the seventeenth century, coffee has become a popular beverage across the continent.

However, some people reacted to this unusual drink with suspicion and even fear, calling it the ‘bitter invention of Satan.’ For instance, when coffee arrived in Venice in 1615, the local clergymen condemned the diabolical drink. According to the National Coffee Association USA, ‘the controversy was so great that Pope Clement VIII was asked to intervene. He decided to taste the beverage for himself before making a decision and found the drink so satisfying that he gave it papal approval.’

Coffee houses sprang up in major cities of Austria, Germany, France, the Netherland, and England. It began to replace beer and wine as the common breakfast drink.

 

• Introduced to North and South America

Coffee was brought to New Amsterdam (later named New York) in North America by the British in the mid-1600s. Although, tea was the favoured drink in North America until 1773.

Ironically, a law (Tea Act of 1773) enacted by the king of Britain King George III of Britain caused the colonists to change their drinking preference from tea to coffee. On December 16, 1773, the colonists protested heavily against the heavy tax imposed on tea when they destroyed an entire shipment of tea sent by the British East India Company in the Boston harbour in Massachusetts. Historians refer to this protest as the Boston Tea Party.

In 1714, King Louis XIV of France received a young coffee plant as a gift from the mayor of Amsterdam. In 1723, Gabriel de Clieu, a young naval officer, obtain a seedling from this plant which was planted in the Royal Botanical Garden in Paris. Despite horrendous weather, a pirate attack, and a person who wanted to sabotage the seedling, De Clieu succeeded in safely transporting the seedling to Martinique, an island in the eastern Caribbean Sea.

Eventually, the seedling planted in Martinique soil has become the parent of all coffee trees throughout the Caribbean, Central, and South America, including countries like Brazil and Colombia.

 

The production of coffee

• The world’s biggest coffee producers

Brazil, by far the biggest global coffee producer, is followed by Vietnam, Columbia, Indonesia, Ethiopia, Honduras, India, Uganda, Mexico, and Guatemala.

 

• Major importers of coffee

The USA is the leading importer of coffee in the world. Germany, France, and Italy follow the USA.

 

• Coffee processing

Put simply, coffee processing refers to the method used to remove the coffee seeds (beans) from the coffee berry.

The two most common ways to process coffee are the natural process and washed process.

 

Natural process

The natural process also called the dry process, originated in Ethiopia. It is the traditional way to process coffee.

The method involves drying out the freshly picked coffee cherries with the seeds (beans) still inside. The coffee cherries are spread out on thin drying beds (layers) to dry in the sun.

Once the coffee beans are dry, a machine separates the pulp and the skin from the coffee seeds (beans).

 

Washed process

Also referred to as the wet processing method, the washed process is another method to process coffee.

In this process, the seeds (beans) are removed mechanically with machines called depulpers from the coffee cherries before they are dried. The depulpers also remove the skin and pulp from the seeds.

After depulping the seeds are put into water tanks where fermentation removes the remainder of the fruit flesh. Finally, the seeds are put onto drying beds in the sun to dry out.

In regions where there is not enough sunshine or excess humidity, the beans can also be dried mechanically.

 

Other ways to process coffee are, amongst others, wet-hulled processing, honey processing, and the anaerobic process.

 

Trading coffee as a commodity

Both varieties can be traded. Arabica, mainly from Brazil and Columbia, makes up between 60 and 70 percent of the coffee market, while Robusta, mostly grown in Vietnam, constitutes approximately 30 percent of the coffee market.

You will need the services and guidance of a trusted and registered commodity broker to trade a commodity like coffee. Such a broker will help you to determine your risk appetite and which trading instrument suits your trading strategy.

There a range of various trading instruments a trader could use to trade coffee, of which futures contracts are the most popular.

Coffee futures contracts offer high liquidity and volatility. A futures contract is a derivative trading instrument, enabling traders/investors to make leveraged bets on the price of coffee.

The Coffee C futures contract is the benchmark for Arabica coffee. The contract is quoted in US dollars and settles into 37 500 pounds of Arabica beans.

Coffee exchange-traded funds (ETFs) are another instrument available to trade coffee. ETFs trade as shares on stock exchanges in a similar way that shares of public companies do.

A coffee contract-for-difference (CFD) allows a trader to speculate on the price of coffee, dealing in changing prices of coffee futures contracts, without buying or selling the contract. The value of a CFD is the difference between the opening and closing prices of the contract, which could result in either a profit or a loss.

 

 

Factors driving the price of coffee as a commodity

As a commodity, the price of coffee is determined by factors relating to supply and demand. Some of the factors are:

• The climate

Coffee crops are extremely sensitive to changing weather conditions. For instance, cold weather can jeopardise crops, causing a decrease in the coffee supply and an increase in the coffee price.

 

• Transportation costs

Also known as distribution costs, transportation costs can influence the price of coffee. Producers of coffee need fuel to distribute their products. The more expensive the distribution costs, the more expensive coffee will become. Hence, the price of crude oil can have a significant impact on the price of coffee.

 

• Health issues

The ongoing debate about the health effects of coffee has an impact on its consumption. Currently, there are conflicting arguments and data regarding the advantages and disadvantages of coffee.

 

• Geopolitics

Political instability in coffee-producing countries can negatively affect supply chains, causing price volatility in the coffee market. This could cause worldwide higher coffee prices.

 

• Impact of the US dollar

Similar to numerous other commodities, coffee is priced in US dollars. The strength of the US dollar will impact the price of coffee. For instance, when the dollar is strong, producers receive fewer dollars for their products and vice versa.

 

The uses of coffee

Coffee beans (seeds) are mainly cured, roasted, ground, and brewed with hot water to make the coffee beverage.

Coffee is a primary source of caffeine in diets.

The ground coffee beans are dehydrated to produce instant coffee.

Coffee is widely used as a flavouring in ice cream, milk shakes, candies, liqueurs, and pastries.

It is used in cooking and baking.

Coffee grounds can be used in numerous ways, namely: as fertilizer in the garden, to repel insects, to neutralise odours, as a natural cleaning scrub, and as a natural dye, to name a few.

 

Note: This article does not constitute investment, financial, or trading advice. Please obtain the advice of a professional and regulated commodity broker before making trading and investment decisions.