Coffee is one of the world’s most important cash commodities and is second in value only to crude oil. Coffee is the common name for any type of tree in the genus madder family. It is actually a tropical evergreen shrub that has the potential to grow 100 feet tall. The coffee tree grows in tropical regions between the Tropics of Cancer and Capricorn in areas with abundant rainfall, year-round warm temperatures averaging about 70 degrees Fahrenheit, and with no frost. The coffee plant will produce its first full crop of beans at about 5 years old and then be productive for about 15 years. The average coffee tree produces enough beans to make about 1 to 1 ½ pounds of roasted coffee per year. It takes approximately 4,000 handpicked green coffee beans to make a pound of coffee. Actually, wine was the first drink made from the coffee tree using the coffee cherries, honey, and water. In the 17th century, the first coffee house, also known as a “penny university” because of the price per cup, opened in London. The London Stock Exchange grew from one of these first coffee houses.
Coffee is generally classified into two types of beans – arabica and robusta. The most widely produced coffee is arabica, which makes up about 70 percent of total production. It grows mostly at high altitudes of 600 to 2,000 meters, with Brazil and Colombia being the largest producers. Arabic coffee is traded on the New York Board of Trade. The stronger of the two types is robusta. It is grown at lower altitudes with the largest producers being Indonesia, West Africa, Brazil, and Vietnam. Robusta coffee is traded on the LIFFE exchange.
Ninety percent of the world coffee trade is in green (unroasted) coffee beans. Seasonal factors have a significant influence on the price of coffee. There is no extreme peak in world production at any one time of the year, although coffee consumption declines by 12 percent or more below the year’s average in the warm summer months. Therefore, coffee imports and roasts both tend to decline in spring and summer and pick up again in fall and winter.
Coffee futures are traded on the Bolsa de Mercadorias & Futuros (BM&F), the Tokyo Grain Exchange (TGE), the London International Financial Futures and Options Exchange (LIFFE), and the CSCE Division of the New York Board of Trade (NYBOT). Options are traded on the BM&F, the LIFFE and the CSCE.
Prices – Coffee prices in 2003 on the CSCE nearest-futures chart remained in a relatively narrow 25-cent trading range between about 50 cents and 75 cents per pound. Coffee prices in the past 3 years have been trading in a narrow and depressed price range with the all-time contract low of 41.50 cents posted in December 2001. Some grades of cash coffee prices in late 2001 hit lows not seen since the 1960s. As 2004 began, however, coffee prices were perking up and posted new 3-1/2 year highs. The main bullish factor was tighter world supplies of coffee due to a small 2003/4 harvest by Brazil that was completed in September 2003. Brazil is the world’s leading producer of coffee, and its harvest was hurt by the biennial production cycle and dry weather. Coffee prices in 2003 were also boosted by the weak dollar.
The very low prices for coffee seen in the past several years have created serious problems for coffee producers. When prices fall below the costs of production, there is little or no economic incentive to produce coffee. The result is that coffee trees are neglected or completely abandoned. When prices are low, producers cannot afford to hire the labor needed to maintain the trees and pick the crop at harvest. The result is that trees yield less due to reduced use of fertilizer and fewer employed coffee workers. One effect is a decline in the quality of the coffee that is produced. Higher quality Arabica coffee is often produced at higher altitudes, which entails higher costs. It is this coffee that is often abandoned. Although the pressure on producers is severe, the market should eventually come back into balance as supply falls to meet demand, thus boosting prices. In fact, Brazil’s 2003/4 crop was sharply lower, in part, because of poor yields caused by the neglect of groves during the long period of weak prices.
Supply – World coffee production in 2003/4 (July-June) was forecast by the USDA at 105.3 million bags (60 kilograms or about 132.3 pounds), down sharply by 15% from the 2002/3 season. The main reason for the decline in world production in 2003/4 was a poor crop in Brazil, the world’s leading producer of coffee with roughly 40% of world production. Being in the Southern Hemisphere, the Brazilian coffee crop is harvested starting in May and extending for several weeks into what are the winter months. Brazil is subject to frosts and freezes and a major freeze occurs about every five years. These events occur most often in June, July and August. Brazilian production in 2003/4 is forecast at 32.0 million bags, down 5% from forecasts back in June 2003. Brazilian production spiked up to 51.60 million bags in 2002/3, depressing world coffee prices, but then production in 2003/4 plunged to the lowest yearly level in 4 years (since 30.80 million in 1999/00). Other key coffee-producing countries are Columbia (with 9% of world production), Vietnam (8%), and Indonesia (5%). In the US, the only areas that produce any significant amount of coffee are Puerto Rico and Hawaii. World stocks of coffee at the end of the 2003/4 season are forecast to plunge by 24% to 21.4 million bags from 28.2 million bags at the beginning of the marketing year.
Demand – World coffee consumption in 2002/3 was estimated by the USDA at 114.0 million bags, up less than 1% from the 2001/02 level. The U.S. is the largest consumer of coffee with consumption of 18.9 million bags in 2002, down from 19.3 million in 2001.
Trade – World coffee exports in 2003/4 are forecasted by the USDA to fall to a 3-year low of 85.87 million bags, down 5% from 90.86 million in 2002/3. The main reason for the decline in exports was simply the lower overall production of coffee in 2003/4. Brazil’s exports in 2003/4 fell sharply by 17% to 24.5 million bags as a result of the poor harvest. The US imports virtually all of its coffee consumption.