No one appreciates a good cup of coffee more than we do, so when markets start to chatter about coffee prices dropping worldwide, we perk up. 

Coffee prices on the open market have dropped 20 percent to 30 percent since the beginning of the year. Some of it is certainly due to the overall drop in commodity prices.  Bloomberg’s Commodity Index has dropped almost 10 percent since mid-May. Indeed, declining commodities are becoming the latest excuse for markets to expect the Fed to stay on hold for the year, despite U.S. Federal Reserve Chair Janet Yellen virtually shouting to the markets that a hike will happen later this year.

Even more interesting is the corollary between coffee and our other passion – foreign exchange. About a third of all coffee in the world is produced in Brazil. Adding in exports from Vietnam get us to about half of the world’s production. We have mentioned a few times this year that the Brazilian real has been the worst performer among quasi-major currencies – down nearly 18 percent year-to-date. 

Having that weak currency, however, means that Brazilian coffee producers, who are paid in U.S.  dollars for their crops, can turn those dollars into a lot more reals to use in their businesses. Accordingly, they have ramped up production to try to take advantage of what they see as a temporary blip in their favor in the exchange rate. Of course, open global markets can be cruel, and not unlike the economic decisions that individual members of OPEC make on supplying oil to the market, actions taken by Brazilian coffee producers to make a little extra money can eventually come back to hurt them. The increase in supply has put downward pressure on coffee prices that has negated the gains from the U.S. dollar.

Like most people, we had hoped that the headlines on declining coffee prices meant that our daily low-fat, no-foam pumpkin-spiced latte was going to be a few cents cheaper. But as we all know, that has not happened. Part of the reason is that there are a lot more ingredients in those drinks than just coffee. But more than that, the reason is that large coffee retailers typically buy their coffee beans via multi-year private contracts that iron out the short-term volatility in coffee prices.

That’s too bad.

Our View:   Coffee, commodities, and currencies all interact in the global market in surprising ways that touch our daily lives. 

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