COFFEE AS A COMMODITY
Coffee is the second most heavily traded commodity in the world (petroleum is number one). It is also world’s most popular beverage, with 400 billion cups consumed every year. It is a major cash crop with the largest portion (around a third) of it grown and processed in Brazil. In Brazil coffee employs over 5 million people.
Coffee trading involves the trading of coffee futures contracts. Coffee futures are standardized contracts where a future price is agreed upon between buyer and seller. Coffee is mainly traded on the New York and London futures markets and these markets therefore determine world coffee prices. Many variables affect the base price of green coffee. Factors such as weather, other markets, political conditions, and futures speculation cause world coffee prices to be extremely volatile.
The four key green coffee traders are the Neumann Gruppe GMGH, Volcafe, Cargill, and E.D. & F. Man. The four leading manufacturers which dominate the coffee market are Nestle, Procter & Gamble, Kraft, and Sara Lee. Notice the absence of Metropolis Coffee Company!
Another dynamic which affects coffee pricing is quality, but not quality in the traditional sense, like “boy is that a quality cup of coffee”. Quality in terms of defect, and more specifically, the number of defective beans in a 350 gram sample. Defects can be a number of different undesirables such as insect damage or unripe beans. There are five classes of coffee, separated by the number of defects found in the sample. Each of the five classes has a different price premium. These classes of coffee are separated as follows:
- Class 1. Specialty Coffee - 0-5 defects
- Class 2. Premium Grade - 6-8 defects
- Class 3. Exchange Grade - 9-23 defects
- Class 4. Below Standard Grade – 24 – 86 defects
- Class 5. Off Grade – More than 86 defects
Class 3 is the grade traded on the NYCE and is bought for “C-price” or commodity price; Class 1 and 2 demand premiums to the C-price whereas class 4 and 5 demand discounts.
Other elements help determine green coffee price also. For example, many countries classify their coffee by using a screen size sorting system. Coffees grown at higher altitudes are ordinarily denser, larger in size, and typically have better flavor profiles. Though there is a loose correlation between size, density, and quality, this rule has many exceptions, and screen size classification should really only be used to verify that coffee is of a uniform size. Other interesting statistics involving coffee and prices can be found here. The up to the second commodity price of coffee can be found by clicking here.
Once a price is determined, coffee is bought on contract, and is exported to the buyer. If the buyer is a coffee broker, then the coffee is resold to roasters. As of this writing, Metropolis uses brokers to import our beans, but we are planning many travels very soon to the far corners of the earth where coffee is grown. There, we hope to obtain the best coffees on the planet at prices fair to the farmers who grow them.