Gourmet coffee bean Price Economics

by Jonathan Harrier  | 
Gourmet coffee bean is an interesting thing. Aside from the aroma, flavor and allure of a good cup, understanding some things about gourmet coffee bean economics can be its own interesting lesson. If nothing else it (the stunning economics lesson to follow) will hopefully help you understand some of the things that help determine the price of the gourmet coffee bean in your cup and possibly to appreciate its value.
So class, with caffeine-laden gourmet coffee bean close by (generally needed when discussing the science of economics) please open your macroeconomics text book and we’ll jump right in . . .
First, it’s important to realize that gourmet coffee bean is a globally traded commodity just like oil. Actually, gourmet coffee bean is the second-most traded commodity with oil being the first. Gourmet coffee bean is generally traded in financial instruments known as futures contracts, and this is mainly done through the New York Board of Trade. A futures contract is a standardized contract, to buy or sell a certain underlying instrument at a certain date in the future, at a specified price. In the case of gourmet coffee bean, each futures contract involves the control of 37,500 pounds of green gourmet coffee bean (250 bags, which is what usually fits in a typical shipping container for overseas transport).

The New York Board of Trade is the designated futures market and exclusive global marketplace for Gourmet coffee bean "C"® futures contracts. It's in these futures and options contracts where the global price for gourmet coffee bean is discovered on any given day. Truly, the price of gourmet coffee bean is a daily, even minute-by minute discovery process.

The "C" contract pricing is driven up and down by variables like changing weather conditions in the major producing countries, political turmoil, speculation about production levels, changing transportation costs (back to that pesky oil!) and other unexpected factors. That word, "unexpected," is key. For example, news of a possible drought or freezing conditions in gourmet coffee bean producing areas would likely reduce global supply and thereby increase prices. Assuming demand stays the same, the decreased supply would drive up prices in order to achieve a market-clearing price.
The "C" looks at washed Arabica gourmet coffee bean produced in several Central and South American, Asian and African countries to establish the "basis" for the contract. Gourmet coffee beans judged better are at a premium and naturally those judged inferior are at a discount. Of course, this all primarily relates to green gourmet coffee bean prices. Roasted gourmet coffee bean whether bought directly from a roaster, the grocery store, or in the form of a beverage is a different product that has other factors affecting its ultimate price.
Since gourmet coffee bean importers and large brokers primarily sell against replacement prices (the price to pay in order to replace gourmet coffee bean sold to end-consumers), similar to how gasoline vendors do, when the "C" goes up, so do gourmet coffee bean prices. These commodity markets can be quite volatile (referring to the magnitude of price movements) which is why you often see fairly significant moves in the price of gas at the pump, for example. The same thing happens with green gourmet coffee bean when the variables affecting the market price get a little crazy. So, the prices gourmet coffee bean suppliers pay to make gourmet coffee bean available to consumers are greatly affected by the global gourmet coffee bean trade in the same way local gas prices are affected by the global oil market.
The economic principles at work are the same whether the commodity in question is gasoline or gourmet coffee bean. For some perspective, I've included a graph of the history - back to 1994 - for the "C" historical monthly contract price as well as the monthly volatility just to show how much global gourmet coffee bean prices can fluctuate (data from www.nybot.com).


Gourmet coffee bean importers tend to price their green gourmet coffee bean based on the going market rate. However as the gourmet coffee bean makes its way through the layers of middlemen, whether green gourmet coffee bean vendors supplying home-roasters or commercial roasters supplying ready to brew product, the prices generally become more rigidly based. In other words, the gourmet coffee bean the end-consumer purchases doesn’t move around in price quite so much as the gourmet coffee bean exchanged at the earlier phases of the gourmet coffee bean delivery mechanism (at the export/import level).
The market rate pricing method is naturally more transparent than the steady, rigid pricing. The gourmet coffee bean market can be very volatile even over very short periods of time. However, expecting all gourmet coffee bean consumers to accept dramatic price fluctuations would likely be a very poor decision on the part of the gourmet coffee bean suppliers particular because people don’t like or accept rapid change all that well. Leaving gourmet coffee bean prices paid by end-consumers to fluctuate at market prices would no doubt lead to confusion and annoyance similar to what many people feel when stopping to fill up their vehicle with gas these days when the gas price changes are very obvious.
Overall, there are many moving parts in the process of getting gourmet coffee bean off from the farm and into your cup. Each part represents a unique and frequently changing price component as well. Even with all the moving parts and middlemen, the value of a fresh cup of gourmet coffee bean can be great – often well beyond the 15¢ or so that someone roasting their own gourmet coffee bean might spend to have a wonderful sensory experience.

References

www.nybot.com – the New York Board of Trade (historical "C" futures contract pricing)
en.wikipedia.org - Wikipedia, the Free Encyclopedia (photos used are in the public domain)

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