The coffee market is the second largest commodity market in the world, explains IronFX
Coffee was consumed in Ethiopia as early as the 15th century and made its way to Europe via Venice; there were no trade connections with North Africa. Coffee only reached America in the 18th century, when coffee beans were smuggled from French Guinea to Brazil. The use of slaves brought about an increase in world coffee production and coffee went from being the drink of royalty to that of the people. Over the years, Brazil became the greatest global producer and exporter of coffee, producing approximately one-third of the world’s coffee.
Today explains IronFX, coffee plants are grown in over 70 countries, mainly in Latin America, South-east Asia, and Africa. There are some 50 species of coffee, but most commercial produce comes from two main types – Arabica (an expensive and high-quality species) and Robusta (cheaper and contains less caffeine). Arabica coffee is the source of some 70% of the coffee consumed in the world, and Robusta comprises the other 30%.
According to estimates, 2.25 billion cups of coffee are consumed every day, says IronFX. According to data from the International Coffee Organization, coffee consumption is expected to rise, due to people becoming more familiar with Western culture and the increase in coffee consumption in China, India, and Latin America.
What influences the price of coffee?
Coffee prices are extremely volatile. This is a slightly surprising fact says IronFX, considering that in the short term, the demand for coffee is relatively stable and isn’t impacted by consumers’ disposable income. So extreme fluctuations in the price of coffee stem mainly from changes in terms of supply:
- Weather conditions– First and foremost, coffee prices are influenced by unpredictable or extreme weather changes that may disrupt supply. For example, in 2014, Arabica coffee bean prices went up by almost 50% due to a drought in Brazil – the world’s greatest producer of coffee.
- Shipping costs– Due to the fact that there is considerable distance between production countries and consumer countries, coffee prices are influenced by the cost of shipping between countries.
- Geopolitical tensions– Since the big coffee producers are developing countries, political tensions characteristic to these countries can cause disruptions in shipment. Furthermore, trade relations between the countries have a great impact on coffee bean prices.
- Speculator investments– Coffee beans are desirable goods in both developed and developing markets, explains IronFX. The massive consumption of this commodity has created a market for futures contracts on coffee. The coffee market is the world’s second largest commodity market (financially speaking) and has huge importance in world economics.