Coffee is one of the world's most important cash commodities. Coffee is the common name for any type of tree in the genus madder family. It is actually a tropical evergreen shrub that has the potential to grow 100 feet tall. The coffee tree grows in tropical regions between the Tropics of Cancer and Capricorn in areas with abundant rainfall, year-round warm temperatures averaging about 70 degrees Fahrenheit, and no frost. In the U.S., the only areas that produce any significant amount of coffee are Puerto Rico and Hawaii. The coffee plant will produce its first full crop of beans at about 5 years old and then be productive for about 15 years. The average coffee tree produces enough beans to make about 1 to 1 ½ pounds of roasted coffee per year. It takes approximately 4,000 handpicked green coffee beans to make a pound of coffee. Wine was actually the first drink made from the coffee tree using the coffee cherries, honey, and water. In the 17th century, the first coffee house, also known as a "penny university" because of the price per cup, opened in London. The London Stock Exchange grew from one of these first coffee houses.
Coffee is generally classified into two types of beans: arabica and robusta. The most widely produced coffee is arabica, which makes up about 70 percent of total production. It grows mostly at high altitudes of 600 to 2,000 meters, with Brazil and Colombia being the largest producers. Arabic coffee is traded on the New York Board of Trade. The stronger of the two types is robusta. It is grown at lower altitudes with the largest producers being Indonesia, West Africa, Brazil, and Vietnam. Robusta coffee is traded on the LIFFE exchange.
Ninety percent of the world coffee trade is in green (unroasted) coffee beans. Seasonal factors have a significant influence on the price of coffee. There is no extreme peak in world production at any one time of the year, although coffee consumption declines by 12 percent or more below the year's average in the warm summer months. Therefore, coffee imports and roasts both tend to decline in spring and summer and pick up again in fall and winter.
The very low prices for coffee in 2000-03 created serious problems for coffee producers. When prices fall below the costs of production, there is little or no economic incentive to produce coffee. The result is that coffee trees are neglected or completely abandoned. When prices are low, producers cannot afford to hire the labor needed to maintain the trees and pick the crop at harvest. The result is that trees yield less due to reduced use of fertilizer and fewer employed coffee workers. One effect is a decline in the quality of the coffee that is produced. Higher quality Arabica coffee is often produced at higher altitudes, which entails higher costs. It is this coffee that is often abandoned. Although the pressure on producers can be severe, the market eventually comes back into balance as supply declines in response to low prices.
Coffee prices are subject to upward spikes in June, July and August due to possible freeze scares in Brazil during the winter months in the Southern Hemisphere. The Brazilian coffee crop is harvested starting in May and extending for several weeks into what are the winter months in Brazil. A major freeze in Brazil occurs roughly every five years on average.
Coffee futures are traded on the Bolsa de Mercadorias & Futuros (BM&F), the Tokyo Grain Exchange (TGE), the London International Financial Futures and Options Exchange (LIFFE), and the CSCE Division of the New York Board of Trade (NYBOT). Options are traded on the BM&F, the LIFFE and the CSCE.
Prices - Nybot Arabica coffee futures prices in 2007 moved lower in the first quarter of the year but then trended higher into the end of the year to post a 9-year high and close the year at 136.20 cents per pound, up +7.9% from the 2006 close of 126.20 cents per pound. Coffee prices saw support from lower production, higher consumption, and tight supplies. The world 2007-08 (Oct-Sep) coffee crop is expected lower by -8.5% to 122.9 million bags from 134.3 million bags in 2006-07, according to the USDA. Brazil coffee production for 2007-08 is estimated at 44 mln bags, -5.8% lower that the 46.7 mln bags in 2006-07. An increase in global consumption is expected to produce a 6-8 mln bag global deficit for the 2007-08 crop year, versus the 5 mln bag surplus for 2006-07. World coffee ending stocks remain tight at 22.3 mln bags in 2006-07 and are forecasted in 2007-08 to decline to a record low of 18.3 mln bags, below the previous record low of 19.8 mln seen in 2005-06, according to the USDA (USDA data begins in 1960-61). Brazil forecasts a 41.3 to a 44.2 mln bag crop for the 2008-09 season.
Supply - World coffee production in the 2007-08 marketing year (July-June) fell 8.5% yr/yr to 122.884 million bags (1 bag equals 60 kilograms or 132.3 pounds). The 2006-07 production level of 134.321 million bags was a new record high. The decrease in production caused the 2007-08 ending stocks to fall 18.0% to 18.330 million bags.
Brazil is the world's largest coffee producer by far with 44 million bags of production in 2007-08, accounting for 31% of total world production. Other key producers include Vietnam with 15% of the world's production and Columbia with 10%. Brazil's coffee production in 2007-08, however, fell 5.8% y/y from 2006-07's 46.7 million bags. Vietnam in recent years has become a major coffee producer, boosting its production to 18.1 million bags in 2007-08, up from less than a million bags in 1990.
Demand - U.S. coffee consumption rose slightly by +5.3% to 23.869 million bags in 2007, not far below the record high of 25.377 million bags seen in 1968.
Trade - World coffee exports in 2007-08 fell 5.3% yr/yr to 96.317 million bags, down from last year's record high of 101.7 million bags. The world's largest exporters of coffee are Brazil with 21% of world exports in 2007-08, Vietnam with 18%, and Columbia with 12%.
U.S. coffee imports in 2007 fell 12.2% to 19.891 million bags. The all-time high of 24.549 million bags was posted in 1962. The key countries from which the U.S. imported coffee in 2007 were Brazil (which accounted for 21% of U.S. imports), Columbia (17%), Guatemala (9%), and Mexico (7%).