• Why is coffee traded internationally in US currency?


    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.  

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