Coffee: Supply and Demand Drivers

Consumed as a morning starter, an afternoon pick-me-up or just as a premise to meet friends, coffee is one of the most widely consumed beverages in the world. Coffee is one of the most ‘visible’ commodities to consumers with lifestyle decisions and global brands built around its consumption. Coffee is sourced from the coffee plant which produces fruit that is harvested to procure coffee beans. The beans are then dried, roasted, ground, and then brewed into coffee beverages. There are two principal varieties of coffee bean, arabica and robusta. Coffee plants grow in a narrow latitude around the equator. Global trade in coffee is primarily green, unroasted beans.

1) Key Trading Parameters:

Exchange Traded: Arabica - Intercontinental Exchange (ICE), ICE Futures US

Exchange Traded: Robusta - Intercontinental Exchange (ICE), ICE Europe

Price Quote: Arabica - US cents per pound

Price Quote: Robusta – US dollars per metric ton

Futures Contact size: Arabica - 37,500 pounds

Futures Contract size: Robusta – 10 metric tons

Contract Months: Arabica - March, May, Jul, Sep, Dec

Contract Months: Robusta – Jan, March, May, July, Sep, Nov

Settlement: Physical Delivery

2) Market Drivers

Global Supply and Demand Dynamics:Brazil, Vietnam, Colombia, and Indonesia are the leading growers of coffee. Central American and African nations also contribute to global coffee production. Over 80% of global cotton production is shipped cross-border. The European Union, US and Japan are the leading importers of coffee.

Quality Differentials: Arabica and Robusta are the first distinctions in coffee bean quality. Arabica is generally a higher- valued and more consistent bean. Robusta has a wider variability of quality with both premium and discounted varieties. Both types are graded after roasting, and sometimes brewing, across a wider range of parameters including color and aroma.

Demand Profile: Coffee is a consumer-driven demand base. Unlike many other commodities which are fungible, coffee users often know the origin and variety of beans and ascribe taste and value perceptions based on that information.

Fair Trade and Sustainability: Although produced on an industrial scale, coffee cultivation is often associated with small-holder farmers. Consumer and activist concerns for the well-being of growers gave rise to “fair trade” labeling which promoted greater transparency around the economic, and more recently, agronomic practices of coffee production.