What is the Coffee Market?
What is the Coffee Market?
Ever wondered how coffee makes it to your cup here in United States when it is grown in some of the most remote locations in some of the least developed economies in the world?
Obviously, demand and people pursuing their own self-interest, through voluntary cooperation, agree to an exchange of value. But how does that happen? How does the farmer and the grower of the coffee know they will get paid for a crop that they have not planted or harvested yet? How about the people at the coffee Co-op, where the raw coffee beans are processed? How does the exporter who loads the crop onto the cargo container for the long trip to the port of call reasonably expect to be paid? What about the importer of the product waiting for customs clearance on the coffee container before it can be staged for shipping to the last mile: the local roaster. How can they all expect to be paid and at what price?
The answer is coffee futures. The concept of a future is one of the major reasons why today we have commodities such as cocoa, soybeans, and many others, including coffee, available to us year round in season and out of season. What is a future? A future is simply an agreement, which is made to buy or sell assets, in this case commodities, on an exchange at a fixed price today for payment and delivery at a later date.
Coffee futures provide a mechanism for all parties in the process to engage in their various operations all based on the future. Farmers can plant and grow, exporters sell and importers buy all based on a market price containing all the information relating to costs, time, availability and many other supply factors balanced against the many things influencing demand.
Today, coffee is the #2 most traded commodity behind oil. Coffee is bought and sold daily on the ICE (intercontinental exchange) on futures contracts. Traders and speculators also have a place in this system, many of them are buying tons of coffee each day with no intention of taking delivery and hoping they never will.
No process is perfect and sure it can get messy, but the coffee futures market it part of the reason coffee is available just about everywhere you go.
-Mavericks