Coffee companies shouldn't let FX fluctuations grind them down...
During the height of the pandemic, with multiple lockdowns and work from home being the norm, many people took up new at-home hobbies. Some people collected houseplants, some baked bread, and others honed their barista skills with newly acquired brewing gear and home-delivered coffee.
But the price of your favourite cup of coffee is increasing and it's not a straightforward calculation as to why. There's a lot happening in the world – almost a perfect storm of factors that are leading to a surge in prices – and coffee companies are doing their best to navigate these issues.
So what's happening with coffee prices?
Let's explore some of the main issues hitting coffee right now.
- Logistics: global supply chains haven't recovered from the disruption and shortage of containers that was well-documented in 2020/21. The availability and price of shipping beans from the major producing countries to the countries of roasting and consumption is pushing up costs, with shipping alone contributing up to a 5x increase in costs.
- Fertilisers: the price of fertilisers has increased by over 30% this year to record highs. Prices were rising anyway, but the war in Ukraine has exacerbated the price surge, especially because Russia is a key exporter of fertilisers.
- Energy: we're all aware of how energy prices are spiralling and the impact that Russia's invasion of Ukraine is having on our bills at home, but energy is needed to produce fertilisers, to ship produce, and in every step from bean to cup.
- Weather: Brazil is the world's leading coffee grower, and it has been cursed by a rollercoaster of weather events including the worst drought in 90 years last year, the strongest frost in decades, and deadly rains that devastated crops. Frost can wipe out coffee crops completely, taking up to five years to restore, and heavy rainfall can ruin yields but might ultimately improve soil for future years.
Whilst inflation and supply bottlenecks are affecting businesses across the globe, there are, of course, highly specific and unique dynamics at play within the coffee market. The relationship between Arabica and Robusta markets, defaults on physically-delivered contracts, and the process of matching supply (with all the issues we've discussed) to demand with a perishable commodity are just a few examples.
👉 Where Oku Markets can support coffee businesses is in their currency risk management and payment operations...
What about currency?
Coffee, like most other major commodities, is priced in US dollars. A stronger dollar in relation to the pound or euro makes coffee more expensive for British or European coffee businesses, compounding the other inflationary pressures described above.
It's not quite that clear-cut, though, which I'll come onto later...
Since early 2021 the dollar has strengthened significantly vs GBP and EUR:
- The pound dropped from $1.42 to $1.30 between Feb-21 and Feb-22
- The euro dropped from $1.23 to $1.08 between Jan-21 and Feb-22
That's an 8% increase in the cost of buying dollars from pounds and a 12% increase when converting from euros – across one year!
The dollar is described as a "safe haven" currency, meaning during times of unrest or geopolitical instability – like a War – the dollar tends to strengthen. As the world's reserve currency, the unit for pricing all commodities, and the currency of the world's largest and most actively traded equity and bond markets, the dollar's reach is enormous and its value is influenced by many factors.
Volatility in FX markets has been subdued for several years but, in the wake of the recovery from the pandemic period, and tightening of monetary policy from the world's major central banks, our expectation is that FX volatility will continue to rise in the near term.
Harry Mills, Founder & CEO Oku Markets
I mentioned that it's not just a case of looking at the price of GBPUSD and EURUSD: Given that the major coffee-producing countries, Brazil, Vietnam, Colombia, and Indonesia have their own currencies, the strength of the dollar against the Brazilian real, Vietnamese dong, Colombian peso, and Indonesian rupiah also comes into play.
For example, consider that growers have a greater incentive to supply when their home currency is weak, which usually pushes coffee prices down. And these emerging market currencies tend to be more volatile, as with their economies, and their interest rates tend to be higher. Take Brazil right now – their central bank is engaged in a highly aggressive tightening cycle, sending the real higher, although it's not too far from the all-time low recorded in Dec-21.
What can you do about it?
Firstly, forecasting price changes in FX is incredibly difficult and almost pointless. So don't do that and don't rely on any bank's forecast. They are almost always useless.
You can't change what happens in the FX market, but you can take the following steps to understand your risk and, if required, insulate your business from adverse currency fluctuations:
- Quantify your risk – how much could you stand to lose from an adverse currency movement and how would you react?
- Create a plan – develop a currency risk strategy (check our blog post for pointers) that suits your risk tolerance, certainty of forecasts, and timeframes
- Assess your FX costs – it's likely that there are efficiencies to be made in your costs of trading. Oku Markets will run a free Transaction Cost Analysis for you to see if you'd be better off trading and making payments through our network.
Get in touch 👋
Contact Oku Markets at 0203 838 0250 or [email protected] to arrange your FX transaction cost analysis and discuss your options for protecting your business and your customers from exchange rate uncertainty.
Oku Markets provides leading currency management solutions for businesses at fair, consistent, and fully transparent prices.
