Coffee Pricing

Coffee is one of the world’s most popular beverages and one of its most important commodities – a commodity whose prices have recently jumped to a 13-year high. With tens of millions of producers scattered all around the world, coffee pricing is a complex topic whose roots lie in the constantly fluctuating forces of supply and demand as well as financial speculation.

Many people don’t know it but coffee is actually bought and sold as a commodity, or a physical substance (or “good”) for which there is a demand and which maintains roughly a universal price. A coffee “future” is a financial asset that is basically a standardized contract for a future purchase or sale of a specific unit of coffee at an agreed upon price. Coffee futures are traded on the New York Board of Trade, also known as ICE Futures US. Interestingly, although coffee futures are mainly traded in New York City, the biggest coffee transfer point in the world is the port of Hamburg, Germany.

Not all coffee is bought and sold on the futures market. Large amounts of “specialty” coffee – such as the coffee sold at higher-end retailers like Starbucks – is purchased through private, multi-year contracts with producers. These contracts often pay roughly double the current commodity price, mainly because specialty retailers are able to sell their coffee at significantly higher prices than wholesale coffee sellers. Also, having multi-year contracts with individual coffee producers “locks in” the price for the buyer while also ensuring their supply no matter what’s happening in the coffee futures market.

The recent jump in coffee prices is due to a combination of several factors. First, a streak of bad weather in South America, where much of the world’s coffee is grown, has hurt crops significantly. The governments of Brazil and Vietnam (a top exporter) have threatened to begin hording their stocks of coffee beans. And on top of everything else stockpiles in the United States have recently reached a ten year low. So basically, higher prices for major coffee companies translate into higher prices for coffee consumers around the world.