Coffee and the Commodities Market
For many people, coffee is a tasty caffeine tonic which makes facing the day a little easier. However, a little further up the supply chain, coffee lives an entirely different existence; that of a commodity oft-traded on international stock exchanges whose global export value is in excess of $20 billion USD. In this blog post, I’m going to explore this global commercial life of coffee. First, I will examine what a commodity is, as well as how coffee both fits into and subverts this definition. Second, I will explain how coffee is traded as a commodity via futures contracts, and finally, I will explain of how participation in international futures markets shapes our coffee offerings here at Café Altura. In so doing, I hope to provide some insight into how the coffee industry functions, as well as how our work at Café Altura fits into the larger machinations of the coffee world.
Coffee as a Commodity
Because we’re speaking about coffee’s status as a commodity, it will be helpful to open our discussion by defining what a commodity is. A commodity is a mass produced good whose quality standard is binary, thus making individual units of said good undifferentiated in the eyes of the market. In other words, individual units of a commodity either conform to a baseline quality standard or do not; units of the commodity which conform to the standard are considered completely identical to every other unit of that good. Commodities are valued for the general utility their quality conveys, not for the properties of or differences between each individual unit. A good example is wheat; so long as a bushel of wheat is properly processed, free of food safety hazards, and usable for food production, it is viable to buy and sell. Distinctions between individual types of growing regions of wheat do not matter; all that matters is the food production utility which the wheat in its generic form conveys.
To our loyal customers, it may seem odd that coffee is defined as an undifferentiated good; coffees grown in different places and processed in different ways differ from one another, after all. We strive to cultivate diverse flavor offerings at Café Altura, and so the natural question arises; how does a coffee company buy goods which are clearly differentiated from one another in a marketplace which does not seem to treat them as such?
The best answer to this question lies in explaining the existence of both specialty and commodity coffee markets. The primary market for coffee in the world which I have discussed up to this point, the commodity market, generates coffee pricing based on a wide variety of factors, primarily supply, demand, and speculation about supply and demand. As with most commodities, the actual quality of the coffee being bought is a minor consideration, with binary quality standards similar to those for wheat. More significant, however, is the holy economic trifecta of supply, demand, and speculation. Because of this, it is difficult to buy consistently top-tier coffee on the commodity market; the system is simply not set up to reward or incentivize the production of high quality coffee, but rather excels at producing large amounts of low-cost, consistently mid-tier coffee.
Demand for coffee which is of a higher quality that commodity grade has created a secondary marketplace, known as the specialty coffee market. The specialty market essentially functions as an inverse of the commodity market; supply, demand, and speculation are still considered, but the quality of the specific coffee concerned is an additional driver of price generation. This leads to a market which incentivizes the production of high quality coffees, as well as experimentation to achieve that quality standard, which, in turn, leads to higher prices. This segment of the marketplace is where we at Café Altura buy most of the coffees we roast and sell. Buying from importers who largely deal with specialty grade coffees allows us to consistently source high quality coffees for you to enjoy, which means we can by and large avoid dipping our toes into the commodity market – though we occasionally do for good reason, which I will discuss later. This odd two-market system means that coffee lives a hybrid life as both an undifferentiated and highly differentiated product, making it a subversive commodity if there ever was one.
Coffee and Futures Contracts
Now that I have defined how the commodity and specialty markets view and value different coffees, I’d like to explore the actual mechanism by which most coffee in the world is bought and sold; futures contracts. A futures contract is a legal agreement in which the buyer agrees to purchase a commodity at a predetermined price at a specified time in the future when the contract expires. The seller of the contract agrees to provide the specified commodity at the expiration of the contract. The basic unit of a coffee futures contract is 37,500 pounds of coffee, or a shipping container’s worth. Pricing for futures contracts is based on the commodity market price, so futures are an important way for coffee roasters and importers to hedge and protect their business; locking in contracts when prices are low to protect against inevitable spikes in coffee price is a common strategy. It’s important to note that when a roaster or importer buys a futures contract, the physical asset being delivered (i.e., the coffee itself) often does not exist yet. It is thus quite common for roasters to book contracts several years in advance if prices are favorable, thus making coffee futures as much about playing the market as they are about actual product. Though we do not often enter this segment of the coffee market, as most of the time our coffee needs are not great enough to warrant buying full containers, it does play a role in our coffee purchasing, and is an important element of global coffee commerce for roasters to understand.
Café Altura and the Commodity Market
As I stated above, most of the coffee Café Altura buys comes from the specialty market; our quality standards are higher and physical needs lower than the standards required to buy primarily on the commodity market. However, to produce our canned coffees, which are made by a co-packer using coffees we source, we require large amounts of a lower-cost, consistent coffee. This is precisely the type of coffee the commodity market specializes in producing, and as such we purchase a container of commodity grade coffee roughly every two months. These coffees rotate between the southern and northern hemispheres over the course of the year to keep product fresh, and primarily come from Mexico in the spring and summer, and Peru in the fall and winter. Contracts are purchased with the aid of our importer, Royal Coffee of Emeryville, CA, who deals with exporters and finds the physical coffee with which to fulfill our contracts. We have a long-stranding relationship with Royal, and their high quality standards allow us to source consistently delicious coffees, even in such large volumes. Though our use of coffee futures is fundamentally for purchasing hard product, we also book contracts aggressively when prices are favorable as a means of hedging against future price increases. We are currently contracted out on our container-lot coffees through the end of next year due to favorable market conditions.
In conclusion, coffee is an extremely interesting and subversive internationally traded commodity. It has many facets to its existence, and we at Café Altura enjoy engaging with all of them to ensure that the coffee you purchase from us is intentionally sourced and delicious. I hope that this insight into our business and processes has proven interesting, and be sure to check back in on this blog often for more discussion of coffee in all its glorious complexity. Until next time.
Article By : Bret Colman, Director of Coffee / Head Roaster, Cafe Altura Organic Coffee