• Price differentials


    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.



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