You’ve probably already read about the coffee supply chain on our blog. It is this cohesive system, and the various members of it facilitate coffee trading, or in simple words, the buying and selling of coffee on the global market.
But aren’t you curious how exactly this works? And why should a coffee consumer be aware of the nature of the trade? Let’s take a closer look at the ins and outs of coffee trading.
The Basics of Coffee Trading
We all know that coffee exchanges a lot of hands by the time it reaches the end user, with each stage of production bringing it closer to being a finished product.
The key players in the coffee trading process are the producers, cooperatives, exporters, importers, roasters, and retailers.
Buyers (usually roasters and exporters) enter into contracts with sellers (growers, traders, roasters) to buy coffee at a predetermined price and time in the future. These contracts make coffee trading secure and help the parties involved execute the transaction.
What Affects Coffee Trading?
Before delving further into the mechanics of coffee trading, it is crucial to know what factors affect the trade. Knowing this will help you understand why the market and the regulations are structured in the way they are.
Changes in consumer habits, the economic growth of a country, climate change, natural calamities, currency exchange rates, disruptions in the supply chain, and several other factors determine how coffee is priced.
With so many external forces influencing the demand, supply, and price of coffee, coffee trading can be highly volatile.
Naturally, every member involved in the coffee trading process wants to ensure some stability and protect themselves from the risks involved.
How is Coffee Traded?
Coffee is traded via a market that is referred to as the coffee exchange.
These coffee exchanges/ markets vary depending on the type of coffee that is traded through it. For example, the Tokyo Grain Exchange is for arabica coffee traded in futures contracts. Whereas the London International Financial Futures and Options Exchange (LIFFE) governs the trading of robusta coffee.
There are primarily two ways in which coffee is traded - in CFDs (contracts for difference) and as futures & options.
CFDs offer a certain level of flexibility in that it doesn’t require the trader to actually own the physical product (coffee beans). Traders can speculate price movements and enter into contracts accordingly.
Usually, the sole purpose of a speculator (investor) trading CFDs is to make a profit from the changes in coffee prices. They can take advantage of both a rise or fall in coffee prices.
Coffee futures involve a contract to buy or sell a particular quantity of coffee at a set price on a specific date.
Options, on the other hand, are a bit less rigid. It gives the buyer the right to buy or sell an asset without being compelled to carry out the trade. In the sense that, they can choose to either receive coffee or a cash settlement when the contract ends. This manner of trading is largely used by traders who want to capitalise on price changes.
Some coffee traders who want to invest in the coffee market also trade in coffee-related stocks or ETFs. This is done through the stock exchange.
Direct vs Indirect Trade
Trading futures, options, and CFDs typically involves middlemen, making it a form of indirect trade. The more people involved, the more a portion of the coffee price goes to them.
To ensure fair and ethical trading practices, many roasters choose to trade directly with coffee farmers. This may not always be a feasible option but it allows them better control of the green beans they are sourcing and also to build long-term relationships with coffee growers.
Furthermore, as they have more information about the origin of the coffee, they are able to educate consumers leading to greater transparency.
As we all know, coffee’s popularity has skyrocketed in the past several decades. With over 2 billion cups of coffee being consumed every day, you can imagine just how much of an important role coffee trading has in the global economy.
Knowing about the "bean-to-cup" journey and being able to trace back your coffee to its origin will enable you to support sustainability initiatives.
Lastly, as specialty coffee roasters invested in the betterment of the community, we encourage you to make informed decisions and learn more about the coffee you consume. A happier community fosters a happier planet.