Coffee Broker Hedging

The coffee brokers in North America (and elsewhere) are impacted by the price of coffee as traded on the commodities market. Coffee prices go up, go down, or trends sideways based on the supply of coffee and the demand for it. Here is the largest NAmer commodity market/coffee:

To protect against rising futures (price a broker will need to pay in the future), the brokers that some of us buy from use “hedging” to balance out their price. Don’t let the concept confuse you. It is pretty straight-forward and this link explains it well with examples:

Hedging helps shield brokers from rising prices. Brokers really don’t take possession of the coffee any more than I have Google or Chevron oil in my pocket. It is merely a piece of paper with entitlement.

While market analysts and speculators follow weather trends, news, etc., I have long maintained that brokers have a much better sense of where future coffee prices are going.

Large brokers have staff traveling the globe to both develop relationships and make coffee purchases. The coffee buyers are talking with farmers, observing the degree of rust, cupping the early crop, and seeing the expansion/contraction of coffee acerage. Brokers have “real time” information that no one sitting at a broker’s trading desk in Fargo can ever hope to obtain. What does the crop look like for the next 3/6/12 months? Ask someone who has people in the fields.

Trust me, Starbucks has more information than any database can hold and it is on that type of information, players in this commodity market WITH staff on the farms throughout the year can best “hedge” against the market.

How seriously, or how heavily a broker gets involved in hedging varies from broker to broker. A friend used to buy from a lesser known broker in NYC. Though not as well known, it is publically traded so I could plow through their financials. In the year I pulled their numbers, a mere 8% of their net income came from movement of physical coffee, the actual selling of coffee to you and me. The rest of their income came from speculating and trading coffee “futures.” I would be very surprised if those ratios held true for the private firms from which we buy.

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