The USD is the reference currency in most coffee transactions. The volatility of the USD exchange rate against the currencies of the world’s leading coffee-exporting countries (9 countries) also impacts coffee prices, as these countries account for 75.7% of the average global coffee exports from 1990 to 2014.
Like many other agricultural commodity markets, the coffee market is influenced by various factors. In economic theory, the price system reflects the balance of physical transactions. In essence, supply and demand are the main factors influencing coffee prices. However, other fundamental factors also affect coffee price fluctuations, including weather issues (such as drought, rainfall, and frost), oil price volatility, and the strength of the USD relative to other currencies. This analysis will compare coffee prices with oil prices and explore the relationship between coffee prices and the exchange rate of the USD against the currencies of selected coffee-exporting countries.
The Correlation Between Oil Prices and Coffee Prices
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Oil plays a crucial role in modern agriculture. It is used as fuel for transportation and agricultural machinery. When fuel prices (oil) increase, the costs for cultivating and harvesting coffee also rise, which can influence coffee prices. In other words, an increase in oil prices can raise the input costs for coffee production, leading farmers to reduce their initial investment in resources such as fertilizers and fuel due to these rising costs. This reduction in input investment can lead to a decrease in coffee yield and production, which could positively impact coffee prices.
To better understand the correlation between oil prices and coffee prices, we can refer to charts showing the relationship between crude oil prices and future prices for Arabica coffee in New York and Robusta coffee in London. The crude oil price index is used as a reference for oil products. Charts 1 and 2 display the correlation between crude oil prices and the average monthly prices of Arabica coffee futures in New York and Robusta coffee futures in London from 1990 to 2014.
According to research by experts from the International Coffee Organization (ICO), the relationship between crude oil prices and coffee prices is shown through regression analysis with the following equation:
Y = aX + b
Where:
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Y is the dependent variable, representing coffee prices;
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X is the explanatory variable, representing the crude oil price index;
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a is the slope of the regression line, indicating the extent of the relationship between crude oil prices and coffee prices;
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b is the constant or random variable.
ICO experts have analyzed data from January 2002 to December 2014, showing a significant correlation between coffee prices and the crude oil price index. The data reveals a strong positive correlation between crude oil prices and coffee prices, with a correlation coefficient ranging from 0.74 to 0.91, indicating that coffee and crude oil prices tend to move in the same direction.
The Correlation Between the USD (and Other Exporting Countries’ Currencies) and Coffee Prices
The USD is the reference currency in most coffee transactions. The volatility of the USD exchange rate against the currencies of the world’s leading coffee-exporting countries also affects coffee prices, as these countries account for 75.7% of global coffee exports from 1990 to 2014.
The table below shows the correlation coefficient between coffee prices and exchange rates between the USD and the currencies of the top 9 coffee-exporting countries (1990 – 2014).
From the data above, we can see that the overall correlation coefficient between coffee prices and the USD exchange rates is low. However, there are four coffee-exporting countries with higher correlation coefficients: Brazil, Ethiopia, Vietnam, and Uganda. The correlation coefficient for the USDBRL (Brazilian real) is -0.49 for the New York market and -0.66 for the London market. For the USD/ETB (Ethiopian birr), the correlation is 0.58 for New York and 0.32 for London. The correlation with the USD/VND exchange rate is 0.46 for Arabica coffee futures in New York, and with USD/UGX (Ugandan shilling), the correlation is 0.38 for Arabica futures in New York.
The London-based Robusta coffee futures market is more sensitive to the supply and demand of Robusta coffee and has a weak correlation with exchange rates of major Robusta-producing countries. Only the Brazilian real has a strong correlation with Robusta coffee futures prices in London. In other words, a stronger USD relative to the Brazilian real typically coincides with a decline in Robusta coffee prices.
The Correlation Between the EUR and Coffee Prices
The Euro (EUR) was introduced in January 1999 and became an active currency in coffee trading from January 2002. It is important to note that the European Union (EU) is the destination for over 50% of the average annual coffee exports from exporting countries. Therefore, fluctuations in the EUR should also be considered when analyzing the correlation with coffee prices.
The EUR also functions as a reference currency in coffee transactions, similar to the USD. From 2002 to 2014, the average annual volume of coffee exports from coffee-exporting countries to Europe was 51.1 million bags, with 47.6 million bags going to EU countries, compared to 21.7 million bags to North America. The table below shows the correlation coefficient between coffee prices and exchange rates (including EUR/USD) from 2002 to 2014.
The data above shows a significant negative correlation between coffee prices and exchange rates for several currencies, including the EUR, BRL (Brazilian real), and COP (Colombian peso). In other words, when the USD strengthens relative to these currencies, coffee prices tend to decrease. Additionally, this correlation is quite strong when considering the currencies of Ethiopia, Mexico, Uganda, and Vietnam, indicating that the exchange rates for these currencies relative to the USD often move in the same direction as coffee prices. However, the exchange rates for the currencies of other countries (Guatemala, India, and Indonesia) relative to the USD do not show a strong correlation with coffee prices.
Conclusion
Overall, the relationship between crude oil prices and coffee prices has not been particularly significant from 1990 to 2014 but gained attention from 2002 to 2014. The correlation between global coffee prices and the USDBRL exchange rate is noteworthy, along with the EUR. These currencies have become strong indicators of coffee market trends. This strong relationship allows for predictions about the coffee market’s direction and the future outlook for global coffee exports. Various empirical analyses confirm that in most cases, a stronger USD tends to lead to lower coffee prices. Additionally, the EUR and USD exchange rates often coincide with rising coffee prices, and vice versa.