• QA 189
    Would producers benefit from sales in currencies other than the US dollar?
    Green coffee sales to Europe by producers we deal with are priced in US dollars. The weakness of the US currency is causing problems but we are told that buyers are against the use of any other currency. Some buyers apparently even maintain that for them to buy in Euros would result in lower prices for the producer. Is there any merit in this statement?
    Asked by:
    NGO - Africa

    If paying in Euros (or other non-US currency) means additional costs or a disadvantage for the buyer then the net price to the producer will reflect this. For example, if the buyer wishes to hedge the price risk on the green coffee purchase he can only do so in US currency as both arabica and robusta futures markets are priced in US dollars. This would involve currency risk that itself must now be hedged, thereby adding additional costs to the transaction. *

    This question arises when the US dollar is weak, as at present. Local currencies in producing countries may strengthen against a falling dollar and if coffee prices do not react upwards… then producers suffer. Some of the reasons why coffee is traded in US dollars have been set out in topic 02.01.07 of the Coffee Guide but your question leads us to add some comments…

    1. The vast bulk of all coffee traded internationally is hedged in some form or another against the New York (arabica) and London (robusta) futures markets. This means that the vast majority of buyers are, in fact, locked into the US dollar, also if they are based in Europe… This is so because risk management is a constant, an inescapable component of today's coffee trade. Banks finance the international trade in coffee, banks are risk-averse and so, they insist on price risk management.

    2. If a buyer priced purchases in Euros then, presumably, so would be his sales. This ideal situation might apply to a roaster, perhaps, but it would severely restrict an importer's resale options. Many potential counterpart traders might not be interested in trading green coffee that is priced in Euros, particularly not if for forward shipment. Of course the importer's bank would also be aware of this and might well ask that, in addition to the normal price risk, the currency risk be hedged as well… After all, buying in one currency and possibly having to resell in another brings the risk of currency fluctuation.

    3. On the producer side there would be no guarantee that a sale in Euros would in fact be more advantageous. Most likely is that whereas the sales value will still reflect the underlying world market price, converted into the non-US currency, all additional costs and disadvantage to the buyer will be deducted. **

    4. Basically then what remains is the expectation that over the life of the transaction there will be an exchange gain for the producer. But this suggests the producer knows where the different currencies are going vis-à-vis his own… How true is this? And of course there will only be an exchange gain (or loss!) if the producer does not hedge his currency risk, i.e. he speculates on the exchange rate.

    Of course there may well be the occasional individual (specialty?) roaster who may be prepared to buy in Euros or some other currency if his favourite producer feels this will assist him. But what should be remembered is that in fact this changes nothing. Currency risk exposure, whether to the US dollar or any other currency, is just that: exposure! 

    Perhaps one should question first of all what the coffee industry, and individual producing countries in particular, are doing to provide growers with accessible and affordable currency risk management facilities. Rather than suggest altering trading practices that, in the end, do not change the fact that risk remains risk remains risk, no matter how disguised or repackaged. 

    *  Futures markets and hedging operations are discussed in Chapters 8 
        and 9 of the Guide.

    ** Exporters should also establish what the local cost structure for Euro
         denominated transactions  would be vis-à-vis transactions based on the
         US dollar.

    Posted 11 April 2008

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