Coffee Market Review (Everything You Need To Know)
June 1, 2018
A crash course on coffee. Learn the basics from coffee production and supply chain.
What Is Coffee?
Everyone knows what coffee is. Coffee is a delicious hot beverage made from coffee beans.
Coffee is slightly acidic and produces an stimulating effect on humans, due to its caffein content.
Well, in fact they are not beans bur seeds from the “coffee cherry”
Do you really know how coffee originated or how does coffee reach a supermarket shelf? Keep reading.
The Origin Of The Word Coffee
The English word coffee originated in the late 16th century as follows:
Qahva (Arabic) -> Kahveh (Ottoman Turkish) -> Koffie (Dutch) -> Coffee (English, c. 1582)
A Short History Of Coffee
Where Did Coffee Originate?
The genus “Coffea” is native to Tropical Africa (especially Ethiopia and Sudan), but can also be found around Madagascar, Mauritius, Comoros, and Reunion.
The history of coffee starts not later than the 10th century in the present-day mountainous country of Ethiopia, in East Africa.
The ancestors of the Oromo ethnic group in Ethipia seem to have been the first to discover the energising effects of the coffee fruits.
The highlands of Ethiopia seem to be the birthplace of the undomesticated plant of coffee.
Yemenese traders were the first to expand the cultivation of coffee when they brought back the coffee seeds, and started planting in their own lands.
The first factual evidence of coffee drinking dates around the 15th century, in present-day Yemen, in Sufi monasteries.
How Did Coffee Cultivation Spread Out?
By the 16th century, traders spread the consumption of coffee all around the Middle East, and Southern India.
Coffee then arrived to the Balkans and Italy to Europe, and parallely Dutch traders brought it to South East Asia, and later the Americas.
French botanists brought it to Paris and from there spread it to their colonies of Reunion Island (then called Bourbon).
Coffee trees are currently cultivated in over 70 countries all around the world.
The Main Coffee Varieties.
There are mainly two types of coffee: Arabica and Robusta.
Additionally, there are tens of commercial coffee sub-varieties in the markets and thousands of native varieties scattered around the original coffee homeland in Ethiopia.
The botanical taxonomy of coffee is as follows:
Species: Arabica (or also Canephora aka Robusta)
Varieties represent small cohesive groups of genetically very similar plants that show common characteristics.
Coffee varieties are all part of the same species. Like for example in the case of apples.
You can infer a lot about a coffee variety just by looking at it when it is still fresh. You expect green Grand Smith apples to taste rather sour/acidic compared to some sweeter delicious red apples.
Arabica Coffee Trees
Arabica trees are prized for their quality coffee beans and grow at higher attitudes, usually on volcanic soils, produce less coffee cherries which are more aromatic and contain less caffein.
Arabica varieties cost more to produce and yield better quality outputs, therefore trade at a premium to (are more expensive than) robusta coffees.
Robusta Coffee Trees
Robusta varieties grow in harsher conditions at lower attitudes.
Robusta coffee plants are highly productive and their coffee fruits are considered stronger and contain more caffein.
Robusta coffee beans are more bitter and less flavory than Arabicas. Thus they are also cheaper.
Coffee Production: Where Does Coffee Grow Today?
Currently, coffee is grown worldwide around the tropics. The main coffee producers are Brazil, Vietnam, Colombia, Indonesia, and Ethiopia.
Most countries grow both Arabica and Robusta trees.
The production landscape is divided into two main groups: a lot of small famers, and large farms and estates.
Coffee Producers: Smallholders
Small communities of farmers usually grow small areas and sell to cooperatives that subsequently sell the green beans to larger traders.
This is because their small production is insufficient to access consumption markets directly.
Large Coffee Producers
Large producers (farms & estates) usually have their own marketing arms that sell directly to final markets or through international commodity traders.
Large producers often also roast the beans and sell directly to retailers, as they try to capture more value in the value chain.
Coffee roasting is fairly concentrated. The largest 3 roasters control about 45% of the world’s roasting.
Four large traders control about 40% of the total coffee trading.
Optimal Age Of Coffee Trees
Coffee trees can live up to 100 years. Older trees generally yield better and richer crops.
Generally, plants above 30 years old yield very consistent good crops.
Producers usually eliminate the flowers in plants younger than 6 years to reduce unnecessary stress in the plant and speed up the growing process.
Sustainable Coffee Trading: Fair Trade Coffee
Fair trade supports farmers in their quest to achieve higher prices and better conditions for their crops.
Coffee production is highly labor-intensive and mainly originates in impoverished economies.
The International Coffee Organisation used regulate international coffee prices until the late 1970s.
This lead to the proliferation a number of fair trade initiatives that foster transparency in the supply chain, and fairer wages for the coffee pickers and farmers.
Nowadays, a number of initiatives try to improve the conditions of the producers while maintaining competitive prices for the consumers.
Coffee Flowering Process
The flowering of the coffee tree is induced by a variety of internal and external factors, which are interdependent.
A change in the metabolic state of the coffee plant will lead to the start of the flowering state.
Coffee belongs to the dicot family of plants. Thus the embryo plants (seeds) that the flowers produce will have two cotyledons.
The flowering process itself takes generally about 8 days.
What Is A Coffee Cherry?
Coffee plants grow coffee fruits, commonly called coffee cherries. Each coffee cherry contains either one male seed or one female seed. Male coffee seeds are rare, and represent only about 5% of the total coffee cherries.
When Are Coffee Beans Ripe?
The coffee cherry grow green and turn red only when ripe.
Coffee fruits do not ripe at once, but over a period of about 6 months.
To ensure high-quality coffee, the pickers should only pick red beans. This makes the collection of coffee very labor intensive, as pickers need to visit the plants every week to monitor the ripeness of coffee cherries.
To obtain good coffee, one needs to pick and process only ripe coffee cherries. Green cherries will lead to sour, low quality coffee.
Coffee Bean Parchment
The coffee seed has a visible external almost transparent layer called coffee bean parchment.
Green coffee is basically a coffee seed that has been processed to remove the parchment.
The Supply Chain Of Coffee Beans.
1- Pick And Sort Out Coffee beans.
The first step is to pick and sort out the coffee fruits. Only ripe coffee cherries should be picked.
Dark or black dead coffee cherries should be completely dismissed.
Pickers collect the coffee cherries from the plantation. Collection is also performed by machines
Coffee Storage in Sacks
Green Coffee can be stored in coffee sacks. Coffee shipments are usually done in coffee sacks.
Coffee grows best in rich and fertile soils.
Coffee requires a high nitrogen and iron-rich soils.
Volcanic soils work well for coffee growing.
Coffee requires high temperatures. Coffee
Coffee trees like full sun conditions, but shadowy environments work well in extremely sunny tropical conditions.
High quality coffee requires in excess of 1000 mm rainfall per year
Coffee can grow at a range of locations in tropical and subtropical locations.
Attitude is one of the most important aspects and will have an impact on the quality of the coffee cherries. As a rule of thumb, coffees grown at higher attitudes are of higher quality.
Coffee Consumption: Who Drinks Coffee?
The main consumers of coffee are USA, Brazil, Germany, UK, Italy, France, Belgium, and Japan.
The largest coffee demand comes from countries that are net importers.
However, developing economies and particularly coffee-growing developing economies are increasing the consumption of coffee.
China will be one of the main contributors of growth in the consumption of coffee in the coming years.
Coffee Futures Trading
The main international future markets for coffee are New York (arabicas) and London (robustas).
There are additional future markets in Sao Paulo and Tokyo.
Coffee Futures Contract Specifications
Coffee futures are traded at the CME and ICE.
Ticker Symbol: KT (CME Globex) or KC (ICE)
Contract Size: 37,500 pounds
Coffee Physical Trading
The main coffee (physical) trading hubs for green beans in North America is New York.
In Europe, the main coffee trading hubs are Le Havre & Marseille in France, and Hamburg & Bremen in Germany.
The Main trading offices are located in London, Paris, Amsterdam, and Switzerland.
Main Price Drivers Of The Coffee Market
Coffee prices vary widely according to:
- Supply Chain disruptions
- Geopolitical instability in producing countries
- Climatic Factors
- Moves by the big four coffee traders
- Kraft / Mondelez
- Sara Lee