Lost in the delicious cup of morning java is that coffee is actually a product and a commodity. While often viewed as a very traditional drink – forms of it date back literally thousands of years – there is always interesting news surrounding the substance. Innovation, commodity prices, corporate branding, and other factors combine to make the world of coffee an ever changing playing field. The news that surrounds it can be a great many things, but it is rarely dull. Here is a look at how coffee has operated as a commodity over the past year:

It would be an oversimplification to say that coffee prices are determined by supply and demand for the product. While that is absolutely true, numerous factors can affect the both the supply and demand, and subsequently the price, for the product. Most of the world’s coffee beans come from just a handful of countries. This means that relatively small scale micro-world problems can wreak havoc on the world’s overall prices. These problems may include, but are not limited to, weather patterns, geologic events, new brands available on the market, average temperatures in consumer markets, price of derivative products, price of other breakfast beverages, etc, etc, etc. For example, a poor crop of oranges in Florida could lead to a spike in the price of orange juice. As a result, many orange juice drinkers switch to coffee for their morning intake. This increase in demand pushes up coffee prices as well. In fact, these two products are linked to the point that there is an old trading adage of “Never be short orange juice going into January or coffee going into July.”

World coffee prices have risen dramatically over the past year. In August 2010, coffee was selling on the futures market for about $250 per unit (with variance depending on a given day). In August 2011, this price has risen to about $270 per unit. This represents an 8% increase over that span. While that seems like a rather dramatic increase, it should be noted that the market as a whole (using the Dow Jones Industrial Average as the baseline) has increased by 9% during this span. As such, the price of coffee has actually risen at a slower rate than market as a whole. That does not necessarily mean much to individual consumers who have seen the price of coffee-based products increase – both at the supermarket and at coffee shops – since they have not seen a 9% increase in the money supply or their own wages. While this should, theoretically, lower demand to the point where it brings coffee’s price back in line with that of typical goods, that has not happened. Instead, it appears that coffee is so popular that consumers are willing to meet the higher prices rather than find other sources for morning caffeine.

While many drinkers want to blame the coffee shops or the producers for how much they spend on java, it is interesting to pay attention to the overall price of the beans and track that against the price at the cash register. As often as not, the price of the drink is being determined before the bean even comes off the plant.

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Category: Food and Drinks
Keywords: Coffee, stock market, orange juice