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  • QA 118
    Question:
    What drives the (price) difference between the markets for arabica and robusta coffee?
    Background:
    I would like to know why there is such a (huge) difference between the markets for arabica and for robusta ? What are the underlying mechanisms ?
    Asked by:
    Student - France
     
    Answer:

    The straight-forward explanation is that, in the end, supply and demand are the underlying factors that cause  movements in the price difference between these two separate but inter-linked markets. However, there are different dimensions to this equation of which we shall elaborate a few. First a very brief background…

    Arabica and robusta are two different species, each with its own quality characteristics that result in different end uses. Broadly speaking, the two are not substitutable except at the lower end of the quality scale. Here price considerations can cause roasters to substitute one for the other - coffee is not a homogeneous product and there are substantial price differences between different 'qualities' in each segment. Traditionally, arabica is used in higher priced consumer products with robusta going mostly to blends (used as a filler) or lower priced products as the original instant coffees for example. Markets that traditionally roast coffee very dark, Southern and Eastern Europe for example, use proportionally more robusta than do for example Northern Europe, parts of the United States and Japan. The reason being that very dark roasts tend to hide, to flatten the finer aroma of the more expensive arabica coffee.

    Demand patterns change. For example, Germany, the world's second largest import market (after the US), traditionally hardly used any robusta coffee. However, by 1990 14% of imports were robusta. In the next fifteen years, i.e. by 2005, this more than doubled to 29% and Vietnam is now the country's second largest supplier. *

    Production patterns change. In 1990 Vietnam exported only around one million bags (60,000 tonnes) of robusta coffee. By 2005 this had risen to between 13 and 14 million bags! During the same period Brazilian robusta production approximately doubled, from 5 million to 10 million bags. However, as a result of enormous growth in Brazilian own consumption much of this is now consumed locally.

    Arabica has always been more expensive than robusta: demand for arabica has traditionally been higher, and it costs more to produce than robusta. So, there has always been a price difference but this 'differential' fluctuates according to the fundamental supply and demand factors for each market segment. 

    Topic box 01.04.01 of the Coffee Guide shows the differential trend between different quality groups of arabica and robusta (topic box 01.02.03) as calculated by the International Coffee Organization. And by going to www.ico.org and looking under Historical Data one can find individual data, by month and year, for all 4 ICO groups. Also included are quotations of the New York (arabica - www.theice.com) and London (robusta - www.euronext.com)  futures markets, all from 1965 onwards. These data are presented in different tables but it is a relatively easy to combine them and look for trends.

    It is clear for example that since 2000 high robusta production (having risen to about 35% of world coffee production) caused the differential to widen enormously, both in absolute and percentage terms. However, currently robusta supply is assumed to be tight because demand has risen (!) and as a result differentials have narrowed considerably as shown below:

     

     

    Average    2005   

    As at 15.09.2006

    Other Mild Indicator

    114.86 cts/lb

    106.92 cts/lb

    Robusta Indicator

    50.55 cts/lb

    78.08 cts/lb

    Differential

    64.31 cts/lb

    28.84 cts/lb



    Simultaneously falling arabica prices and rising robusta prices confirm the existence of different supply and demand factors for each type of coffee

    There are other technical reasons, including speculation, why differentials fluctuate but space does not permit us to go into detail. However, Chapters 01, 08 and 09 of the Coffee Guide provide good insight in the functioning of the coffee market as does Chapter 02. Interesting market overviews (consumption) are also to be found in the 2005 Annual Report of the European Coffee Federation - go to www.ecf-coffee.org and look under Publications.
     

    * One major reason for this increase is that modern technology allows more robusta coffee to be used in a wider range of blends.

    Posted 14 October 2006

    Related chapter(s):
    Related Q & A:
    QA 016, QA 017, QA 042, QA 051, QA 098