The Journey of Commodity Coffee: From Trade to Your Cup

Understanding coffee pricing is made complex by the fact that its a commodity agricultural product elevating its status through quality, sustainability and story telling. Given its complexity starting with coffee as a commodity is foundational. Once the foundation is set, we can dive into certifications and specialty coffee.

Commodity coffee, one of the most widely traded commodities globally, has a fascinating journey from farm to cup. This article will guide you through where it's traded, how it's traded, its pricing, the delivery of commodity contracts, and the logistics of getting the physical goods to their final destination.

Where is Commodity Coffee Traded?

Commodity coffee is primarily traded on two major exchanges:

1. ICE Futures U.S. (Intercontinental Exchange):

   • Arabica Coffee: Traded under the ticker symbol KC.

   • Location: New York.

   • Price: Cents (US) per Pound

2. ICE Futures Europe (formerly LIFFE):

   • Robusta Coffee: Traded under the ticker symbol RC.

   • Location: London.

   • Price: US Dollars per Metric Ton

When I first looked at these graphs, they didn’t make any sense as there’s no units on the graph but they’re understood for those in this field.

When you see Last Price of Arabica as 231.350 and Robusta as 4339.00, its very strange. Converting them both to US Dollars per Pound, the last price is $2.31 and $1.97 respectively (at the time I took these screen caps).

How is Commodity Coffee Traded?

Coffee trading involves futures contracts, which are standardized agreements to buy or sell a specific quantity of coffee at a predetermined price on a future date. Here’s a breakdown of how these trades happen:

1. Futures Contracts:

   • Standardization: Futures contracts are standardized for quality, quantity, and delivery date. For instance, one Arabica coffee contract on ICE Futures U.S. represents 37,500 pounds of coffee and one Robusta coffee futures contract on the ICE Futures Europe (formerly LIFFE) represents 10 metric tons (~22,046 pounds) of coffee.

   • Trading: Contracts are traded on the exchange's platform where buyers and sellers negotiate prices. Prices fluctuate based on supply and demand, weather conditions, political stability in coffee-producing regions, and other economic factors.

   • Speculation and Hedging: Traders include speculators aiming to profit from price changes and producers or consumers hedging against price volatility.

Pricing of Commodity Coffee

The price of commodity coffee is influenced by various factors:

1. Supply and Demand:

   • Global supply is affected by weather conditions, diseases (e.g., coffee rust), and harvest yields in major coffee-producing countries like Brazil, Vietnam, and Colombia.

   • Demand trends include rising consumption in emerging markets and consumer preferences for different coffee types (Arabica vs. Robusta).

2. Economic Factors:

   • Currency fluctuations, especially in the US dollar, impact prices since coffee is traded in dollars.

   • Global economic conditions and commodity market trends also play significant roles.

3. Market Reports and Speculation:

   • Regular reports on crop forecasts, inventories, and consumption patterns influence market sentiment and speculative trading.

How Commodity Contracts Get Delivered

While many futures contracts are settled financially, some result in physical delivery. Here’s how the delivery process works:

1. Delivery Notice:

   • At contract maturity, the seller issues a delivery notice to the exchange, indicating their intention to deliver the physical commodity.

2. Warehouse Receipts:

   • The exchange uses a network of approved warehouses where the coffee is stored. Sellers deposit coffee in these warehouses and receive warehouse receipts.

   • These receipts are transferred to the buyer, representing ownership of the coffee stored in the warehouse.

3. Grading and Quality Control:

   • The coffee is inspected and graded according to the exchange’s standards to ensure quality compliance.

How the Physical Goods Get to Their Destination

Once the contract is settled, the physical delivery process begins:

1. Logistics Planning:

   • Buyers arrange for the transportation of coffee from the warehouse to its final destination. This involves selecting shipping methods (sea, air, or land), coordinating with logistics providers, and managing customs documentation.

2. Transportation:

   • Shipping: Most coffee is transported by sea in large shipping containers. Specialized containers ensure the coffee remains in optimal condition.

   • Customs Clearance: Coffee shipments must clear customs in both the exporting and importing countries, requiring proper documentation and compliance with regulations.

3. Distribution:

   • Once the coffee reaches its destination port, it is transported to roasting facilities or distribution centers.

   • From there, it is distributed to coffee roasters, retailers, and ultimately to consumers.

Some of the Top Buyers of Commodity Coffee include:

• Nestlé: Nescafé and Nespresso

• JDE Peet's: Douwe Egberts, Peet's Coffee, and Senseo.

• Starbucks: Nuff Said.

• Lavazza: Same.

• The Kraft Heinz Company: Maxwell House

• Smucker's: Folgers

• Keurig Dr Pepper: Keurig single-serve coffee K-Cup pods

Conclusion

Commodity coffee trading is a complex yet well-organized process involving multiple stages from futures contracts to physical delivery. By understanding where and how coffee is traded, its pricing dynamics, and the logistics of delivery, one can appreciate the intricate journey of coffee from the farm to your cup.

Looking ahead, I’ll get into certifications, ‘Fairtrade’ and other attributes that affect the pricing beyond commodity coffee.