Ever wondered how coffee is produced and how it’s value is determined? This guide covers why coffee has become a key ‘trend’ commodity in the market, how it’s produced, and what factors influence coffee prices the most.
Alongside explaining how the two different types of coffee plants are grown, we explore the top coffee-producing countries.
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What Makes Coffee Valuable?
Coffee is a soft commodity derived from a plant that grows mostly in subtropical and tropical climates.
The beverage produced from the cherries on these plants is a primary source of caffeine in diets in both emerging and developed countries.
Coffee is such an important dietary staple across the world that it has spawned a staggeringly large economy of its own.
Coffee roasters, packers, growers, marketers and coffee equipment manufacturers depend on the commodity as do dairy producers and restaurant operators.
How is Coffee Produced?
Coffee plants grow in two varieties – Arabica and Robusta. The cherry that grows on the plant contains seeds – known as beans – that are roasted to make coffee.
Arabica plants grow in subtropical and tropical climates in both lower and higher altitudes.
The Difference Between High And Low Altitude Coffee Crops
Lower altitude crops require well-defined rainy and dry seasons and altitudes of between 1,800 and 3,600 feet. Such conditions produce distinct growing and maturation seasons.
Higher altitude crops grow near the equator at altitudes of 3,600 to 6,300 feet. Coffee plants here require frequent rainfall and produce two harvesting seasons.
Where Do Robusta Coffee Plants Grow?
Robusta plants generally grow at much lower altitudes than Arabica crops. Coffee producers plant Robusta in regions 10 degrees north or south of the equator at altitudes ranging from sea level to 3,000 feet.
Robusta plants can tolerate warmer weather than Arabica plants.
Global production of coffee was measured in jute bags which hold up to 60 kg of coffee. Coffee exporters now use one-ton polypropylene super-sacks instead of jute bags.
Which Countries Produce The Most Coffee?
The total global production of coffee by exporting countries exceeds 150 million jute bags annually.
Arabica beans generally comprise more than 60% of the total production.
Over 50 countries produce coffee, but the overwhelming majority of the crop grows in just ten countries:
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Exporting countries consume about one-third of the more than 150 million jute bags consumed annually. Brazil is the largest consumer among the exporting countries.
In the United States alone the economic impact of coffee exceeds $225 billion and accounts for more than 1.6% of the country’s GDP.
What Drives the Price of Coffee?
- Discretionary Income
- Transportation and Oil Prices
- Health Issues
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Geopolitics & The Coffee Market
The top five coffee-producing countries account for about two-thirds of global production, and the two largest producers – Brazil and Vietnam – often account for about half of annual production.
All of these countries have histories of political instability.
Political crises such as leadership vacuums or corruption scandals can unnerve markets and create concerns about supply disruptions.
Climate Impacts On Coffee Farming
Coffee crops are highly sensitive to weather conditions.
Crops need the right combination of rainfall and sunshine to yield maximum output. When these conditions don’t materialize, supply becomes restrained and prices rise.
The fact that the bulk of coffee production is concentrated in a few countries exacerbates this problem.
Global warming patterns have the potential to create long-term drought conditions in coffee-growing countries. If these patterns persist, coffee prices could head higher in the years ahead.
Demand: Coffee Is Not A Necessity
Therefore, patterns in discretionary income and spending can play a significant role in moving prices.
In developed regions such as the EU and the United States, trends in unemployment and average hourly earnings could serve as important barometers for changes in coffee consumption
In emerging markets, overall economic growth could impact coffee consumption. China, for example, has shown a pattern of shifting toward Western dietary norms as its economy has matured.
Although China has more tea than coffee drinkers, coffee may rival tea in the years ahead.
Transportation and Oil Prices
Coffee growers have to transport their beans to consumers and businesses around the world, and all forms of transportation require fuel.
The price of oil can have a major impact on the price of coffee.
Disruptions to refinery operations can cause the price of oil to rise. Buyers of coffee should expect prices for the commodity to have a positive relationship with energy prices.
Health Issues Related To Coffee
The medical community has produced conflicting evidence about the health effects of drinking coffee.
Coffee enthusiasts note the beverage’s benefits for disease prevention and its numerous antioxidants including vitamins B2 (riboflavin), B5 (pantothenic acid), and B1 (thiamin).
However, caffeine in coffee can lead to anxiety and disrupt sleep in some people. It also is an addictive substance.
The extent to which the public embraces the positive or negative message about coffee could impact demand and prices for the commodity.
The US Dollar’s Impact On Coffee
Commodities, including coffee, are priced in US dollars. Sellers of coffee receive fewer dollars for their product when the US currency is strong and more dollars when the currency is weak.
A strong US dollar can potentially depress coffee prices, while a weak US dollar is usually good for prices.
Where Can You Trade Coffee?
Interested in trading commodities like Coffee? Start your research with reviews of these regulated brokers available in that offer stocks, ETFs or derivatives based on coffee and other agricultural products.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74%-89% of retail investor accounts lose money when trading CFDs. You should consider whether you can afford to take the high risk of losing your money.
If you’re ready to trade coffee, head over to our Coffee Trading Guide where you can learn about different coffee trading instruments.