The price of coffee before the fluctuations of the foreign exchange market
– DESCRIBE THE ORIGIN –
Most of the prices of arabica and robusta in the market are based on futures contracts. These are commitments to buy and sell a certain amount of coffee at a pre-agreed price at some point in the future. In which, C price and coffee futures are determined by coffee transactions or real-time supply and demand. In addition, the price of coffee also fluctuates according to the exchange rate. The main reason is that coffee is sold in US dollars on the C market, but is bought in other currencies when exchanged in different producing countries. Therefore, changes in the value of these currencies can increase or decrease the price of coffee. To better understand the impact of the foreign exchange market on coffee prices, let’s find out now with 43 Factory Coffee Roaster!
The volatility of the forex market
The foreign exchange (FX) market is where traders exchange currencies and determine exchange rates for different currencies worldwide. It is the world’s largest exchange market in terms of revenue, with approximately US$7.5 trillion traded every day (as of April 2022). FX does not have a central exchange, it operates through over-the-counter (OTC) networks.
As a trading market, FX is affected by macroeconomic factors, such as inflation, central bank policies, interest rate fluctuations, and important political events. For example, the 2022 Colombian presidential election caused huge volatility in the forex market when the winner of the election was Gustavo Petro. According to an analysis by Kelly Oviedo – Forex Trader and Controller at Sucafina, this volatility is due to Gustavo Petro’s commitment to promoting the use of renewable energy. Meanwhile, Colombia is one of the world’s top oil exporters. So, when Petro was elected president, global markets were concerned that the Colombian government would have new policies restricting oil exports. This has weakened the Colombian peso against other currencies in the financial markets.
Ms. Oviedo also said that another important factor affecting the exchange rate is interest rates. The price of a currency depends on the interest rate of the central bank of the country that owns that currency. When a country changes interest rates, the difference in interest rates between countries affects currency conversion.
The double impact of the foreign exchange market on coffee prices
Price of fresh coffee at the place of production
The foreign exchange market has an impact on all stages of the coffee supply chain, especially for producers through production costs and changes in domestic coffee prices. It is an essential factor affecting the production and business of coffee growers, thereby changing the price of fresh coffee at domestic farms.
For example, chemical fertilizers are produced using petroleum and are traded globally in US dollars. When the local currency of the producing country is weaker against the US dollar, farmers will have to pay more for fertilizer. Fertilizer is one of the important overhead costs that account for the majority of the production process. If input costs are too high, coffee prices in that country will also be higher than in other countries. Conversely, when the local currency is stronger against the US dollar, producers can save on fertilizer costs, and coffee prices will be significantly lower.
In addition, the exchange rate also affects the domestic price of coffee. Kelly – an expert on the foreign exchange market said, This influence is related to the purchasing power of exporters. When the US dollar is stronger, exporters can pay a higher price for their coffee, so they can better compete with the local market. This can make it difficult for domestic buyers, but can also benefit producers as they receive higher income.
Price of green coffee beans in the country of consumption
Unlike fresh cherries, the price of green coffee beans is purchased mainly in US dollars and is directly affected by the exchange rate. But coffee roasters in different countries have to pay in their local currency. That difference in the value of that currency against the US dollar will affect their costs.
For example, a roaster in Canada will pay more for green coffee if the Canadian dollar is weak against the US dollar. Conversely, if the Canadian dollar is stronger, they will pay less. This also affects consumer demand for coffee. When the US dollar is strong, roasters in the US can buy green coffee cheaper, which increases the demand for coffee in the US.
As can be seen, foreign exchange impacts coffee prices throughout the supply chain, affecting the interests of producers, traders, roasters and consumers. There are advantages and disadvantages when the exchange rate is different, but one thing is for sure, the taste of coffee still has the same attraction. If you want to experience coffee from all over the world, visit XLIII Coffee – The brand developed from the forerunner 43 Factory Coffee Roaster to enjoy!