Monday, February 28, 2011

Coffee Prices From a Different Perspective

This is a subject I have been interested in for a long time but lacked a forum to develop any ideas. I have been curious about the spasms in the Commodity price for coffee and how currency fluctuations effect both the producers and the consumers. Recently anyone in the coffee business can't ignore the heights that the "C" has climbed, closing today at $2.7170. The thing that started me thinking recently is the fact that economics in the world have changed and drastic measures are currently being taken to get a handle on the catastrophic events caused by the Sub Prime mortgage market and access to easy credit. The American Federal Reserve reaction to the events was to increase money supply through stimulus initiative which both increases economic activity and reduces the value of the American Dollar. Any American who has travelled extensively in the past decade or so has seen their spending power erode when they convert their greenbacks to local currencies. Here in Canada very recently we were accustomed to receiving $0.65 US for every Canadian Dollar we exchanged. At today's market close I would receive $1.03 US for every Canadian Dollar I exchange. When I examined the relationship of the Euro to the USD I found a similar relationship.
I began to think that although there has been an increase in the "C", that a decent portion of that increase was actually a weakening of the USD. Think of it this way, if I am purchasing coffee with money that is worth less, the price of the coffee must increase. I decided to create a chart to visually represent the relationship of the American, Canadian and Euro to the "C" price for the years 2001, 2005, 2010 and Present.

Graphically the important thing to notice is how the pitch of each graph differs. Notice the strength of the USD in relation to the other currencies in 2001, and how it's value relative to the others has reduced. Looking at the Canadian and Euro lines, both follow a similar trajectory which probably follows the actual increase in the commodity price. When we look at the USD line, it clearly has a greater pitch than either the CDN or Euro. In fact, that increased pitch begins as early as 2001 for both comparisons. If we were to extend the lines out a year, the price gets increasingly steep for Americans, and less so for the rest of the world. I did take some time to examine the British Pound, but the Pound is a mess largely due to the same factors which are affecting the USD. I know there are some Aussies and Kiwis out there reading so when I get some time I'll poke into those currencies as well and maybe throw gold into the mix.
Important Additional Note: I spent a few minutes looking at what the "C" would look like if the USD had maintained the relative price levels versus both the Canadian Dollar and the Euro circa 2001 to see what the "C" price would look like today.
If the Canadian dollar was still worth .65 USD, then the "C" would be priced at $1.7585 USD today.
If the Euro was still worth 1.05842 of a USD, then the "C" would be priced at $1.86 USD.
These numbers would indicate that the difference between $2.7170 and $1.86-$1.75 USD is the impact the depreciation of the American Dollar has had on the "C" or between $0.85-$0.97 USD.

2 comments:

  1. This is great. Thank you and keep them coming!

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  2. Mezzo_di_caffe@twitter c market is crazy and all that is said is true but bottom line prices are also being fueled by greedy origins asking for premiums on top of c market price ( you know who you are Colombia) and even more greedy speculators and traders hoarding stocks to inflate prices further - eg. Bog standard hga Costa Rica is now same price as finest mandheling Indonesian ! Don't believe the hype - its not all c market !

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