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Coffee prices surge due to supply shortages

Coffee prices jumped in April due to the coronavirus outbreak. Additionally, grain futures for May gained more than 15%. Consumers are purchasing coffee, trying to avoid shortages since supply chains face disruption. However, the price increase will be short-lived if coffee shops remain closed.

Coffee is the latest commodity where the pandemic has impacted prices and accessibility. The picture displays a forex trade graph concept – Finance Brokerage

 

What is affecting coffee prices?

The quantity that grain producers receive for their coffee depends not only on the volatile global market but also on exchange rates. Most of the world’s coffee is handled as a commodity, which supposedly has equal value everywhere. It means that the highest quality crops that come from one country will be marketed alongside lower quality coffee from another country, but will be treated the same, at the same price.

The headquarters of the grain marketing center is the Intercontinental Exchange (ICE) in New York. There, the price of coffee, known as price С, undergoes negotiation in United States dollars (USD). Specialty grain sells at higher prices but still experiences the influence of price C changes. Frequently, what is paid for the premium quality coffee is a price C plus.

However, the market for raw materials does not follow simple rules. Prices are relative and constantly changing. Not only professionals buy the commodity. Also, merchants who have an interest in making a profit by buying and selling commodity market shares. This speculation can dramatically affect price C since it artificially distorts supply and demand. 

The grain undergoes comparison to other raw materials that will be traded that day. If other products are more attractive, fewer merchants are likely to speculate on coffee. If the other products are less attractive, more merchants are expected to speculate on the coffee.

How exchange rates affect rates

In theory, the prices of raw materials should be a mere reflection of supply and demand. The supply of coffee may decrease due to climatic adversities, pests, conflicts, among others, which increases prices.

On the other hand, if there is a lot of supply or little demand, prices will fall. In 2019, the C price reached its lowest point in a decade. Although several factors caused this, one important reason was Brazil’s oversupply of coffee.

US dollars set price C. However, with notable exceptions such as Ecuador and El Salvador, most countries have their currency. Therefore, the exchange rate will also affect the amount that producers will receive for their coffee. And just like the C price, the exchange rates are also fluctuating all the time.

As with commodity prices, exchange rates fluctuate according to supply and demand. Expectations of a nation’s economic strengths and weaknesses set the demand for the commodity. If it is weak, demand and value will fall. If perceived as strong, demand and cost will increase.

The value of the dollar can also cause variations in the price C. Otávio Sandrin, commercial coordinator of O’Coffee Brazilian Estates in Brazil, stated that if the USD rises, in general, the price C falls to balance the final price.

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