Can we dictate the coffee prices to the international market ?....

In my last analysis, We had discussed at what rate can a small coffee grower sustain ? I got lot of replies saying Rs 1600 – Rs 1800 should be fine. But who is fixing this rate ?... During those days, I used to visit a shop in Virajpet everyday to ask the rate. I used to wonder why these people never bother to increase the price. In this topic, I have done some studies to find out how the rate of a coffee bag is derived.

Coffee is a crop which became an important commodity in international trade during the nineteenth century. Since then it has suffered from long periods of over supply and low prices followed by relatively brief periods of short supply and high prices.
During the period of severe economic depression in the 1930s and during the second World War from 1939 to 1945, supply increased, demand fell and prices were low.
In the immediate post war years, however, demand increased and supplies were inadequate to satisfy this rising demand.
Between 1950 and 1953 stocks reached levels below the minimum needs for normal trading purposes, a situation which was made worse by the outbreak of the Korean War and a serious drought in Brazil, which was followed by a frost. Prices rose to unprecedented heights in 1953. This gave rise to a substantial increase in planting throughout the world and over production followed. Stocks increased and, in the second half of the 1950s and early 1960s, prices fell drastically. This followed by “INTERNATIONAL COFFEE AGREEMENTS 1962, 1968 & 1976 etc.. Quota system was brought into place and that also failed somewhere in 1993.*7*thTeuOVINkGHOziFeWL0HoQddUhkrjnxZfu-f-krgXHXrE-a3lK/Average97to02.jpg

Above graph shows how the prices in the international market fell during 1997-2003 . This situation was caused by the imbalance between supply and demand for Coffee. Total production of Coffee in year 2001-2002 was estimated to be 6.78 Million Tons while world consumption was just over 6.36 Million Tons. On top of that world stocks were upto 2.4 Million Tons. Coffee production has been rising at the rate of 3.6% p.a while consumption was increasing by only 1.5 %.
It is estimated that 125 Million people worldwide are dependent on coffee for their livelihoods. The above consequence of year 2002, where growers depend largely on coffee for income either move heavily on debt, commit suicide or start selling the land and migrate to cities.

Lets look at the SUPPLY and DEMAND market :

Supply :
Brazil is the highest producer of coffee in the world followed by Columbia, Indonesia, Veitnam and Mexico.

India has a share of approx 3 - 4 % of World coffee production. Kodagu’s last year output was estimated at around 100,000 Tons. It comes around nearly 1.5- 2 % of total world coffee output.

DEMAND :*Fuf3CLtp*twMYA382tTLz*87bwuQq1IlpAdW7JSFLuhgmt0yUYhYcKMK/Demand.jpg

Above chart shows coffee consumed by each person per year. It clearly shows that India is nowhere in picture. Largely becoz of the huge population and North Indian trend of Tea.

There are a set of procedures to be followed by the agents of the Executive Director in the USA, Germany and France for the collection, tabulation and transmit the prices of coffee on the markets of New York, Bremen and Hamburg and Le Hevre and Marseilles and henceforth calculate the daily indicative prices. They are divided into 4 sections

1. Procedure followed on the New york market
2. Procedure followed on the German market
3. Procedure followed on the French market
4. Procedure to calculate the daily group & Indicator price.

Prices are sought for 4 types of coffee namely : Colombian Arabic, Other Arabica, Brazilian natural and Robustas.
Here I shall show how a robusta coffee price is derived :

1. The Agent of the ED in New York Market shall collect, tabulate and transmit direct to the London Office the info on the daily prices of green coffee on the New York Physicals market for following growth of coffee:
Ivory Coast Grade 2
Indonesia EK Grade 4
Uganda Standard
Vietnam Grade 2

Prices shall be expressed in US Cents / Per pound of Green Coffee.
Trading between 2.45PM to 4.45 PM New York Time
Prices shall relate to ex-dock quote for prompt shipment on New York physical market
Quote shall be sought from at least 5 traders and brokers in New York for each of the growth.
The daily price for each growth obtained by the arithmetic mean shall be transmitted by the agent daily by fax/mail to reach the organization by 9.15 AM London Time on the working day following each market day.

2. Same procedure is carried out in German market, however the robusta price is not influenced by this market.

3. The Agent of the ED in France Market shall collect, tabulate and transmit direct to the London Office, the info on the daily prices of green coffee on the French Physicals market for following growth of coffee:
Cameroon Grade 1
Ivory Coast 2
Indonesia EK Grade 4
Uganda Standard
Vietnam Grade 2
Prices shall be expressed in Euro / Tonne of Green Coffee.
Trading in the late afternoon – France time
Quote shall be sought from atleast 5 traders and brokers in Le Havre and 2 from Marseilles.
Same shall be converted to US Cents and sent by Fax/mail to London

Share of each market for Robustas shall be as : 18 % New York and 82 % France.
Then the Indicator price is derived with the following type of Weightage.

- Colombian Milds : 14 %
- Other Milds: 20 %
- Brazil Naturals – 31 %
- Robustas – 35 %.

Below table gives a rough idea of approx average prices traded in 2 markets for the past 10 years.*RMmgjBQhd*xsnKtoU-uhHNgi4XFQi6iOJ3EqL6*W25l0*vdcEWWRrGSygSmWoS4LdRt/Robustarates.jpg

Also the currency exchange factor plays a vital role . In the above chart you can notice the value of robusta has come down slightly from 2008 to 2009 , but it is the weak rupee factor has kept us in track.
“Indian coffee” in no way plays its part to change the price of a coffee bean !!!.. it is only failure in other countries especially in Brazil (where 31 % weightage) and more demand gives a reason for us to celebrate a good rate of Coffee.
Maybe years to come, marketing in China, Russia and other countries there shall be more demand which in turn increases the value of our coffee bean.
Also in my opinion more demand in India shall not affect the rate as we drink the coffee in Rupees, whereas Other countries drink in Euros and Dollars. The demand in India should reach such a situation, instead of exporting think of importing coffee bean to Indian market, then at that stage Kodavas can dictate terms because we are producing a product which is imported by our country.