How does foreign exchange affect coffee prices?
Much of the price of Arabica and Robusta coffee will depend on futures contracts – a legal agreement to buy or sell a specific commodity at a predetermined price on a certain date. However, in some cases, fluctuations in exchange rates or changes in the foreign exchange affect coffee prices. These fluctuations can negatively impact the prices farmers receive as well as their production costs. Let’s find out more details with XLIII Coffee!
Foreign exchange market and causes of volatility
The foreign exchange market is a global, decentralized market used to trade currencies and determine exchange rates for every currency in the world. It is the world's largest exchange, with daily turnover reaching $7.5 trillion in April 2022 for decentralized exchanges.
Like many other global financial and trading markets, changes in the foreign exchange market (also known as the foreign exchange, FX or currency market) are often caused by a number of macroeconomic factors. These can include inflation, central bank decisions, interest rate fluctuations or changes from political events. For example, Kelly Oviedo - Trader and Forex Controller at Sucafina said that the 2022 Colombian presidential election has affected the foreign exchange market. Especially since winner Gustavo Petro has run a campaign promoting greater reliance on renewable energy. Meanwhile, Colombia is a major oil exporter. So when Petro was elected, global markets predicted that his party would pass policies to reduce oil exports. This resulted in the Colombian peso weakening in global financial markets.
In addition, Kelly said that the price of money is also another factor that can affect exchange rates. Because the price of a particular currency is related to the interest rate from that country's central bank. If one country lowers or raises interest rates relative to another country, the difference in value will put additional pressure on that country's currency conversion.
Fluctuations in the foreign exchange market affect coffee prices in the producing country
Coffee is imported and exported all over the world and bought and sold in different currencies throughout the supply chain. Therefore, the foreign exchange market affects every stage of the coffee supply chain. As for producers, they are affected by the foreign exchange market through production costs and changes in domestic coffee prices.
For example, chemical fertilizers, which often account for a high proportion of production costs, are traded globally in US dollars. Therefore, to some extent, fertilizer prices are related to the value of the US dollar. Manufacturers must buy fertilizer in local currency. Therefore, fertilizer import prices may be affected by the exchange rate between the US dollar and the manufacturer's local currency. For example, when the Colombian peso is weaker against the US dollar, producers will have to spend more money on the right amount of fertilizer. Additionally, if the Colombian peso is stronger than the US dollar, producers simply pay less for the same amount of fertilizer.
Additionally, Kelly said, the foreign exchange market can affect producers through its impact on local coffee prices. That is, the strength of the US dollar relative to the manufacturer's local currency can affect the purchasing power of exporters. This can make it easier or harder to compete with local buyers. For example, a weaker local currency means exporters may have to pay more (in local currency) for coffee, leading to producers ultimately receiving higher prices. In turn, this difference can have serious consequences for local buyers as they have to pay more.
Foreign exchange affects coffee prices in consuming countries
Green coffee beans are mainly traded in US dollars. Therefore, prices from roasters outside the United States are affected by exchange rates and foreign exchange markets. Furthermore, these roasters buy coffee that was originally purchased in US dollars, but they need to pay in local currency. So the price they pay is also affected by the value of the local currency relative to the dollar.
For example, if the exchange rate is 1 US dollar to 1.50 Canadian dollars, a Canadian roaster will have to pay more for their coffee. If coffee is $10/kg, Canadian buyers will have to pay CA$15/kg for the same coffee. Conversely, if the US dollar weakens to the point where 1 US dollar equals 1 Canadian dollar, the Canadian roaster would only pay CA$10/kg, assuming the coffee price remains constant in US dollars.
Fluctuations in the foreign exchange market have an impact on coffee prices throughout the supply chain, affecting manufacturers, traders, roasters and consumers. In recent years, the foreign exchange market has had unpredictable changes, making profit margins and risks much higher. According to experts, producers and buyers can only reduce risks through reducing costs associated with currency fluctuations, using forward contracts that peg the current exchange rate between the pound and the dollar US at a certain percentage of the total cost. However, risk prevention measures are not always effective, so relevant parties need to monitor and learn carefully to make the right decisions, appropriate to their situation.
If you want to experience specialty coffee beans from around the world but are concerned about currency conversions and exchange rate differences, visit XLIII Coffee. Coffee is imported officially, ensuring clear and transparent prices for each bag and cup of coffee in the hands of the experiencer.
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