There’s been a lot of news lately about the price of coffee in the commodities market. The following is a guest post by Colson Hauser, a futures and commodities broker with Foremost Trading in Geneva, IL that does a great job explaining the whole chain to those of us who may not trade futures on a daily basis – or ever, for that matter.
What Are Coffee Futures?
Coffee is one of the most highly traded commodities throughout the world. When we use the term “traded,” however, what do we really mean?
Most commodities throughout the world are bought and sold through an exchange of some sort — think a modern day electronic marketplace. The price of a commodity at the marketplace can change every day, minute or even second by second! Especially when dealing with coffee, this price volatility can cause problems for people throughout the whole supply chain: farmers, shippers, distributors, and roasters. To stave away some risk that comes with quickly changing prices, those involved with coffee (and commodities in general) have used something called a “futures contract.” A coffee futures contract, for example, is a contract between a buyer and seller to make their transaction at a future time for a set price. Why is this necessary? Here’s a brief story…
Imagine Coffee Farmer Joe spent the whole year planting and harvesting his coffee as best he could. But once he gets to the marketplace, he realizes all the other farmers arrived earlier. The over-supply drove the price of coffee down. Coffee Farmer Joe was able to sell his crop, but not at the price he needed to break even on all his costs. Next year, Coffee Farmer Joe decided he would sell a coffee futures contract — meaning he would agree to deliver his crop to a buyer at a predetermined price long before he even harvested the coffee cherries. How much easier would it be to run a coffee farm if you know what price you’re going to receive for your crop one year in advance instead of just guessing? Coffee Farmer Joe had a very profitable year because he was able to manage his expenses with the knowledge of how much his crop would be sold for.
Naturally, this is a simplified example of just one use for a vast, complex and multifaceted system of trading. Today, coffee is traded through several different commodity exchanges throughout the world, but the largest is the Intercontinental Exchange (ICE). In 2013, over 7.1MM futures contracts of coffee were bought and sold. Since each coffee futures contract is for a standardized amount of 37,500 pounds of coffee, you can imagine the aggregate size of coffee traded on paper. The futures markets where coffee futures contracts are bought and sold work to create a transparent price of a commodity based on supply and demand so large farms and large industrial suppliers can run their business at lower and lower costs.
Where does FreshGround fit in to all this?
We don’t. While a futures exchange can help create a global system for large coffee suppliers to manage their business efficiently, it doesn’t necessarily facilitate an environment where Coffee Farmer Joe receives the real value of his quality coffee. FreshGround circumvents much of this process by working with organizations who deal with farmers directly.
This practice involves sourcing coffee from direct relationships with farmers. Prices are negotiated directly between buyer and farmer and incentives are provided for producing quality – not based on an exchange in some other country.
Let’s go back to Coffee Farmer Joe. Let’s say Joe partners with Growers First (the organization we work with to bring you our Honduras and Market Blend) to farm his coffee. Growers First’s primary concern isn’t simply making a profit. Their concern is the well-being of Coffee Farmer Joe, his community, the health of the environment and the quality of the coffee.
What is more beneficial to Coffee Farmer Joe – coffee farmed, exported, roasted and sold based on a bottom-line dollar value, or coffee that is produced with the well-being of the farmer, community, environment and even consumer in mind?
Our priorities are different from other roasters, especially large, industrial names who think they are the best part of waking up. Most businesses are focused on the bottom line, so they buy their coffee in the most cost effective way, which doesn’t necessarily guarantee a good product. We’re interested in providing you top quality coffee directly from farms that are paid a fair and sustainable wage for their labor. This direct process helps to ensure the coffee you buy is actually getting better over time because farmers have the means to keep quality a priority.
Our craft is coffee; our vehicle is expert roasting; our goal is to bring you phenomenal, freshly roasted coffee while helping to transform communities around the world. At FreshGround, we only sell coffee obtained through direct relationships with missions-minded organizations, such as Growers First. So next time you hear some financial market pundit scream through the rectangle on the wall about changing coffee prices, remember that not all coffee – and not all roasters – are the same.
For a real life example of how organizations like Growers First are making a difference in the lives of coffee farmers, click here.
Photos shown from Na Wokabaut and Growers First.