The volatility of coffee prices in the forex market and how to balance risks

Exporters often sell coffee in US dollars, so its purchasing power relative to the local currency can affect how competitive coffee prices are in the producing country. When the local currency is weaker against the US dollar, importers and exporters can buy more coffee for the same amount. This means they can sell their coffee at a lower price than local buyers, enhancing their competitiveness.

An example of this is the case of Brazil and Colombia – the two largest coffee-producing countries in the world. From the beginning of 2021 to the end of 2022, the Brazilian real and the Colombian peso depreciated against the US dollar. This benefits coffee producers in these two countries, as they can sell their coffee at a higher price in their local currency, offsetting the fall in international coffee prices (low market prices) more by 2022).

Ricardo dos Santos Bartholo, owner of Fazenda Cinco Estrelas in Patrocínio, Minas Gerais, Brazil, shared that, when the US dollar strengthens, the Brazilian real weakens. But this in turn increases the income for producers when selling coffee, as they can better compete in the international market at a more optimal price.

Exchange rates are an important factor in the coffee supply chain, and roasters need to monitor its fluctuations so they can adjust their business strategies. Because they are bought and sold on the international market in US dollars. Their prices can vary according to the value of that currency against the dollar. However, roasters must pay in local currency to import into their home warehouse.

For example, a roaster in Canada buys green coffee in US dollars but sells roasted coffee in Canadian dollars. If the exchange rate is 1 US Dollar to 1.5 Canadian Dollars, a kilo of green coffee costing US$10 would be equivalent to C$15. But if the exchange rate is 1 US dollar to 1 Canadian dollar, one kilogram of green coffee is only equivalent to 10 Canadian dollars. This means that the Canadian roaster will be more profitable when the exchange rate is low and vice versa.

Exchange rates can also affect coffee demand. When the US dollar is strong against other currencies, US roasters will pay less for green coffee, which will reduce production costs and increase competitiveness. This will stimulate coffee demand in the US and other countries that use the US dollar.

Roasters can hedge against fluctuations in exchange rates by using currency-forward contracts. These are contracts that allow them to buy or sell a specific currency against another at a future date at a predetermined price. In this way, they can minimize the risk caused by changes in currency values.

Alternatively, they may choose to use futures contracts for hedging. Companies will sell a coffee futures contract when they buy a “physical” coffee contract at price C. This means that if the price of C falls, these companies can profit from the analogy. futures and use the profits to offset the price of their “physical” coffee. Conversely, if the price of C rises, these companies will suffer losses in their futures contracts but may end up selling their coffee at a higher price.

Thus, it can be concluded that foreign exchange is an important factor affecting coffee prices globally. Foreign exchange fluctuations can bring benefits or risks to stakeholders in the coffee supply chain. Therefore, monitoring and forecasting the volatility of foreign exchange is essential to make effective business decisions in the coffee sector.

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