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The Top Factors that Move the Price of Coffee


Over the last few centuries, coffee has grown into one of the world’s most popular drinks. In addition, coffee has also grown to be an important cash crop. In fact, statics have it that over a hundred million people in the developing world depend on coffee as their main source of income.

There are mainly two types of coffee namely Arabica and Robusta coffee. The both of them are traded worldwide on various exchanges, meaning that investors who are looking to profit from coffee prices have a number of options available to them. Robusta coffee is generally more expensive than Arabica coffee mainly because the biggest buyers – Kraft, Nestlé, Procter & Gamble, and Sara Lee – bought more of the former. Below are the top factors that move the price of coffee.

Geopolitical factors
When you look at the top coffee-producing countries as a group, one of things that come to mind is that they could be politically instable. Statistics have it that the top five producers of coffee collectively account for about 65.6% of the world’s coffee production. The table below shows how much coffee each of the five countries produced in 2011.

Top five green coffee producers in 2011

Rank

Country

Tons

Bags x1000

Market share

1

 Brazil

2,609,040

43,484

33.1%

2

 Vietnam

1,200,000

20,000

15.2%

3

 Indonesia

495,000

8,250

6.3%

4

 Colombia

468,000

7,800

5.9%

5

 Ethiopia

390,000

6,500

5.0%

 

 

5,162,040

86,034

65.6%


Due to the political instability that these countries often experience, the market responds so swift to any issue from these countries. At its heart, the response of the market to such events is in response to the potential drop in supplies from these countries. At such periods, coffee prices go up. And as you might expect, issues in Brazil and Vietnam have the biggest effect on coffee prices, as they jointly account for close to 50% of the world’s production.

Here is an instance. Prior to the 2014 FIFA World Cup (soccer) hosted by Brazil, there was a crisis. While much emphasis was not laid at that time with regard to coffee prices due to the fact that coffee prices had been up for most of the year, this event sure caused a bit of change in the coffee market. The fear was that the crisis could escalate and go all the way to threaten green coffee production in the country.

Climatic factors
Coffee is highly sensitive to weather conditions. It just does not thrive in certain weather conditions. From what history has shown us, we can safely say rain has to fall just about the right time and sun has to shine at right time for coffee plants to grow properly. When these things do not happen as they should, farm output becomes low and hence, supplies become a problem. This situation usually sends prices high.

However, due to the global warming, these unfavorable weather conditions is what the world is now witnessing, and Brazil has had its fair share so far. For instance, coffee prices saw surged significantly in 2014, which was initiated by an unprecedented drought. Usually, for optimum growth, rainfalls in the early months of the year are vital to coffee producers in Brazil, as this is the key rainfall period leading into the growing season. Up until August, the drought, which had stopped, was still moving coffee prices, with analysts saying that the drought might have resulted in 20 to 30 percent crop loss, signaling that supplies would tighten up.

After the drought, an unseasonal rainfall came around, which also sent prices higher. This unseasonal rain threatens 2015 coffee harvest, as it might bring about early flowering, during a usually dry month of August. Considering that the global warming is still very much around, investors have to monitor weather trends in coffee producing nations. This could be key to profiting from coffee prices in future.

Speculator effect
Due to the fact that coffee is a highly traded commodity, the market activities of traders have significant effect on coffee prices. A rise in coffee trading activities usually results in a surge in the price of coffee, signaling to the market that there is an increase in the demand for coffee. In addition, the trading activities for other related commodities like oil could also influence green coffee prices.

Enterprise trading
It might also be of help to keep tabs on what big coffee companies are buying. Here is why. According to International Coffee Organization, the “Big Four” coffee roasting companies – Kraft, P&G, Sara Lee and Nestle – purchase approximately 50% of the coffee produced worldwide. This does not even include Starbuck, which is also a big player in the coffee industry. As stated earlier, Robusta coffee is more expensive than the Arabica coffee mainly because these companies brought more of the Robusta coffee. Therefore, if you are looking to trade futures of Arabica coffee, which is by the way the most popular, you want to look at what these companies are buying. If they decide to buy more of Arabica coffee, then you can expect Arabica coffee prices to go up.

Global demand outlook
With more countries transitioning into what is called the developing world, the demand for coffee is on the rise. For instance, as much as Brazil is the world’s biggest producer of coffee, it does not even belong on the list of top ten coffee consumers, per capita. In addition, none of the top twenty coffee producing nations belongs on the list of the top ten consumers. This is mainly because they are less industrially.

 Therefore, as these countries become more developed, you can expect that the demand for coffee will be rise significantly. This is already taking place in Brazil, Vietnam and Colombia. On August 4, 2014, Wall Street Journal reported that coffee producers in these countries are selling more coffee in the local market. The longer this trend holds, the higher the potential that coffee prices would surge. Therefore, it might help to look at what the global coffee demand spectrum looks like when looking to predict coffee prices.

 

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