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Coffee trade: a basic lesson on the economics of the price of coffee

From the March 2011 issue.

At a time of record coffee prices, Charles Beelaerts revisits the foundations of coffee trade and commodities on the stock market.

Story by Charles Beelaerts

In the year 2000 one financial commentator suggested that coffee was of such great significance in the world economy that units of currency should be expressed in terms of a cup of coffee. Well over 2.3 billion cups of coffee are consumed in the world every day, with most consumption taking place in industrialised countries, although over 90 per cent of coffee production takes place in developing countries. In Brazil, for example, the world’s largest coffee producer, over 5 million people are involved in the cultivation and harvesting of coffee plants.

A Myth Dispelled?
Since the early-1970s there has been a myth circulating that coffee is the second most traded commodity in the world after oil. The myth was reinforced by Mark Pendergast in 1999 in his book Uncommon Grounds: The History of Coffee and How It Transformed Our World. But ,10 years later, Pendergast wrote that he thought he was wrong and so was everyone else who repeated the myth. His explanation covered several pages and it is too intricate to reproduce here, but one piece of evidence he referred to is that aluminium, coal and wheat futures contracts are all traded more actively than coffee since the mid to late-1990s.

If you look only at agricultural commodities and use the United Nations Comtrade figures, coffee comes in seventh after wheat, cotton, meat, milk, leather and sugar. However, there is no denying one thing: coffee is indeed the second most valuable primary commodity exported by developing nations and in excess of 100 million people depend on it for a living.

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