Coffee is not a homogeneous product; if it were then all producers
would receive the same price. Each parcel of coffee is unique with regard to
its characteristics, flavour and quality and hence attracts a different price.
However, coffee is traditionally treated as a homogeneous commodity and priced
against the level established in one of the main terminal or futures markets.
Consequently the bulk of the coffee trade is conducted on what is known as a ‘price
differential’ or ‘price to be fixed’ basis. See section 09.00.
This involves the buying and selling of coffee with the price expressed as a
differential to the futures market, usually on an FOB basis in the country
concerned. For arabica coffee the futures market is primarily New York, while
for robusta it is the London market. However, not all coffees are priced
initially in this way. Some, such as coffees from Kenya, have the price
established via their national auction system, although in the resale market
even Kenyan coffees tend to be priced on what is known as a differential basis.
There is, however, a substantial difference between the physical market for
coffee and the futures market. In the physical market real parcels of coffee
are traded whereas in the futures markets contracts to supply or receive a
standard quality of coffee at some date in the future are traded. Physical and
futures markets are necessarily closely linked and both play an important role
in determining the price of coffee. However, prices on the futures markets
(section 08.00) reflect expectations about future events and are essentially
speculative, while the prices quoted on the physical market reflect short-term
availability especially of near substitutes.
Roasters are becoming increasingly sophisticated in their blending techniques
and are now more prepared to substitute one coffee for another in their blends,
if, for example, there are problems with supply or the price of a close
substitute is more attractive. Given this ability to switch between origins,
roasters tend to look for value for money, especially where close substitutes
are concerned, and may not necessarily maintain the type or group composition
of their blends. In addition, fierce price competition between roasters
encourages them to look for the best qualities at the lowest prices, especially
of near substitutes.