This question is often asked, particularly at times when the US
dollar is weak. When local currencies in coffee producing countries strengthen
against a falling dollar then growers suffer, or do not benefit if global prices
rise. What, therefore, are the possibilities of selling in currencies other
than US dollars, for example the Euro considering that the European Union is by
far the world’s largest consumer of coffee?
There are many sides to this issue but the points below suggest
that, although change is always possible, for the time being it is unlikely.
- Coffee
is a global commodity that is traded worldwide on a daily basis. It
would be very difficult to maintain this global liquidity if some coffees
were priced in different currencies. Point in case: in 1992 the London
robusta market moved from using pound sterling to dollars for that reason,
thereby also facilitating arbitrage between the New York and London
futures markets.
- Price
risk management would become very difficult if the market had to interpret
both futures price movements, and currency movements for each and every
hedging transaction. 80 to 90% of the market is
mainstream coffee that is priced and/or hedged against the New York and
London futures markets, both priced in US currency. Also, New York is by
far the world’s leading futures exchange and would be most unlikely to
move away from the US dollar. Finally, using different currencies in a
single transaction could mean that a correct decision on the coffee price
might be totally offset by a wrong assumption on the currency front.
- The
currencies of many countries are loosely linked to the US dollar in the
sense that they often follow dollar movements,
particularly so in Latin America where the US is of course the predominant
trading partner. This is not the case in most of Africa where the European
Union plays that role.
- The
US market will of course continue to purchase in US currency and many if
not all origins will oblige. If elsewhere
coffee were traded in a different currency, this might possibly distort
prices and add currency-based arbitrage to an already quite speculative
coffee trade.
One should also bear in mind that buyers will always protect
themselves. If having to buy in a different currency means more risk or a
disadvantage, then this will be priced into the transaction. Therefore, it is
difficult for individual exporters or smaller producing countries to pursue
this unless of course such a change was in the context of a general industry
move, triggered by some external event or situation.