Buying Coffee As A Commodi Essay, Research Paper
Introduction
Coffee is a refreshment drink that is produced in many topographic points throughout the universe. Coffee is the 2nd most of import traded ( legal ) trade good in the universe next to oil ( Trouble Brewing 1 ) . Coffee is considered a trade good, that is widely traded on several world-wide exchanges, most notably the New York Board of Trade ( NYBOT ) . A future market for java exists in order for purchasers to cut down hazard every bit good as for speculators to try to derive a net income. The aim of this study is to research the background, the cardinal analysis, and proficient analysis of java to make prognosiss and recommendations for the acquisition of $ 500,000 of java.
Background
In general, java can turn in the part around the equator due to its tropical clime. This part includes Central America, Northern South America, Africa, the Middle East, India, and Indonesia. Latin America and the Caribbean produce most of the universe s java. Over two tierces of the universe java production is exported from Latin America and the Caribbean ( Trouble Brewing 1 ) . The United States and Europe consume most of the universe s java production. Together, the United States and Europe consume two out of every three bags of java produced in the universe ( Trouble Brewing 1 ) .
There are many assortments of java trees, but merely three are used commercially: Arabica, Liberica, and Robusta. Arabica makes up approximately 75 % of universe supply, opposed to Liberica and Robusta, which are normally used in instant java due to their rough spirit ( Coffee Production 1 ) . Arabica java is broken into three classs: Brazilian Mild, Columbian Mild, and Other Mild. Since Arabica java makes up about all of the universe supply of java and Brazil is the taking provider of java worldwide, we will concentrate merely on Brazilian Mild Arabican java.
Arabica java trees are really sensitive to sudden alterations in temperature. For illustration, a hoar will typically kill them ( Coffee Production 1 ) . Arabica trees grow best deep in the land, in a clime of 65-75 grades Fahrenheit, with a high one-year rainfall of 60 inches, and at an height of 2000 to 6500 ft. ( The Cultivation of Coffee 1 ) . After they are foremost planted, Arabica trees mature in three to four old ages and can go on to bring forth fruits for 20 to thirty old ages ( Coffee Facts & A ; Figures 2 ) . A typical Arabica java bean takes nine months from its blossoming phase to go a ripe, choice able cherry. Typically, one tree outputs about two lbs of beans per twelvemonth, which means that a great trade of labour is required for every cup of java ( The Cultivation of Coffee 2 ) .
Stairss in Coffee Production
Reaping
It takes about three to four old ages for a java tree to get down to bring forth fruit. The fruit of the java tree is called the cherry, which turns brilliantly ruddy when ripe. The maturing procedure takes eight months ( The Cultivation of Coffee 1 ) . Coffee beans are the seeds of the cherries. Each cherry merely yields about two beans.
Most java harvests are picked by one of two ways: manually or by machine. If the cherries are picked by manus, each tree will necessitate several visits because the tree s fruit ripens at different times. This procedure contributes to the high cost of java ( Coffee Production 1 ) . With mechanical harvest home, a machine shakes the java tree so that all of the berries fall to the land, irrespective of ripeness. This amendss the trees and besides requires that the ripe and green berries to subsequently be sorted.
Processing
Once the java beans are picked, they have to be processed instantly which can be done by one of two ways: the dry method or the wet method. The dry method is the most traditional method of treating java every bit good as the easiest and cheapest. With the dry method, berries are left out to dry in the Sun, raked several times per twenty-four hours, and covered at dark to maintain out wet. The cherries are raked until their wet content falls to 11 per centum, which can take from seven to ten yearss ( 10 Stairss to Coffee 2 ) . When they are dry plenty, the beans can be heard rattle and are so moved into storage ( 10 Stairss to Coffee 2 ) .
The moisture method is more expensive that the dry method and is normally reserved for the best manus picked assortments of java ( Extracting the Coffee Beans 2 ) . The biggest difference between the two methods is that with the moisture method, the cherries are non air dried before the mush is removed ( 10 Stairss to Coffee 3 ) . Alternatively, the mush is removed from the bean 12 to twenty four hours after reaping ( 10 Stairss to Coffee 3 ) .
Making the Class
Next, the java is ready to be graded. There are many factors that are taken into consideration in the scaling of java. The height, part, care given to cultivation, type of harvest home, and attending given to treating are all of import in finding the quality of the beans ( Coffee Facts 2 ) . The beans are sorted harmonizing to size and weight by machine and so besides may be manus sorted to take any imperfect beans ( Coffee Facts 2 ) . Finally, a little part of beans from each batch is roasted and tasted by a professional ( Coffee Facts 2 ) .
Cardinal Analysis
Cardinal analysis is one of two ways to calculate a monetary value and it is done through understanding the implicit in factors that affect monetary value, including supply and demand. Through this apprehension, it is possible to quantify qualitative information to calculate monetary value. Factors that affect supply are weather, stock list degrees, engineering, disease, crop times, and production degrees. Factors that affect demand include the economic system, substitutes, sensed quality, and consumer penchant. Through the scrutiny of these factors, a monetary value will be forecasted for April of 2001 by gauging a alteration in the supply or demand to utilize in a theoretical account to foretell monetary value.
Weather is a important factor in java production. Coffee trees must acquire the right sum of H2O and sunlight. Almost all java is grown around the equator because of the needed high temperatures. Droughts and inundations are the top causes of conditions phenomena that affect java production. In Figure A1.1 it is possible to see the affect conditions has on java. In 1994, a record harvest was planted that would hold yielded 102 million bags of java. However, a drouth in Brazil and Columbia damaged about 20 % of the harvest. Merely 92.5 million bags were produced in 1994, a loss of more than 10 % of the entire universe estimated production. In fact, it was a 1 % lessening from the old twelvemonth s production degree. Another twelvemonth that the conditions had a great impact on java was in 1996. Columbia experienced important rainfall that twelvemonth and merely 88 million bags were produced, a 9 % lessening from the old twelvemonth s production. There has been some drouth in this old ages blossoming phase in Brazil, but plenty to merely diminish supply by approximately 2 %
Stock degrees besides have a major affect on supply. Both 1996 and 1997 illustrate the affect stock degrees have on supply in highly different ways. In 1996 production of java decreased 9.17 % . However, warehouse stocks remained consistent with old old ages stock. Normally, if the stock degree remains the same or additions, it would take to lower monetary values. The difference in 1996 was that java was being stored, non sold despite a lessening in production. This alteration in stock degree was motivated by the java agriculturists, who were seeking to keep more stock to make a supply deficit, therefore increasing the monetary value. The scheme was successful, but it merely led to the lessening in demand for java, which will be discussed subsequently.
In 1997, merely the opposite happened. After the 1996 error of hive awaying excessively much java, a great trade of the java that was stored was lost to decompose and bad quality. Many of the beans produced in 1996 and 1997 had quality defects that made the java bean bitter. Therefore, despite a 14 % addition in java production, the entire stock of java dropped about 31 % from the quality jobs. This has kept warehouse Numberss down for the past few old ages, but two record harvests in 1999 and 2000 helped acquire warehouse degrees back up. If stock degrees continue to increase at the current gait, this would add about 4 % more stock in May.
Technology has greatly increased output consequences. Traditionally java was dried and sorted by manus, doing more of the supply to decompose or go faulty. Since the early 1990 s, mechanization has taken topographic point in many coffee-producing states. Beans are dried and sorted by machines, cut downing the sum of clip that the java takes to acquire to the market. Technology has besides increased the sum of berries that each tree produces through genetically altered java trees. Technology has continued to increase outputs each twelvemonth, so our estimation is for a 3 % addition in supply due to technological progresss.
Disease is another factor that can impact supply. Tracheomycosis is the disease java is most prone to. There has been no large jailbreaks in the past 10 old ages, but it is estimated that 3-4 % is lost every twelvemonth to diseases. Other diseases include Koleroga and Nematodes. There have been no known jailbreaks this twelvemonth, but as in the past disease will claim at least 2 % of the harvest.
Harvest clip has a little consequence on supply. Since most java is grown around the equator, the harvest period ranges within two months of each other, from part to part. These times are from May and September. This may look like it would hold an consequence on java purchases during May, right before crop Begins, but it is really the antonym. Since it takes a twosome of months to dry the beans, the transportation season for java normally does non get down until mid November and the old twelvemonth s production does non acquire done before following twelvemonth around March. This is why the old twelvemonth s production has more impact on the monetary values for the following twelvemonth. In Figure A1.2, you can see that the first four months of each twelvemonth are less volatile than the staying months. The large monetary value additions normally happen during the beginning of harvest season in June, July, and August. This occurs because purchasers start to scramble to purchase java based on the patterned advance of the crop, doing it more hard to buy in the undermentioned months.
An illustration of this would be in early 1994. There was adequate production from 1993 to purchase in early 1994 at sensible monetary values, despite concerns about harvest output because of a drouth in early 1994. Prices did increase, but they were non every bit volatile as in June and July. The same java could hold been bought in April for 87.14lb. would hold cost 211.81lb. in July. This is to demo that the large monetary value additions normally do non happen until harvest season of that season begins. We do non experience that there will be any important lessening because of the crop clip in relation to the clip we are to purchase the java.
The production degree, or the sum of budding trees, is the last important factor on the supply of java. With engineering increasing the sum of output per tree, many java husbandmans have been able to increase capital to put in new trees. It takes about four old ages for a tree to bring forth cherries, so the sum of java trees budding has increased significantly the past four old ages. Many new trees were planted in the mid 1990 s when java agriculturists began increasing their outputs and deriving more money. These new trees had a important impact on production degrees in 1999 and 2000. A projection degree of crops from new trees is around 3-4 % , so we are presuming a 3 % addition in new crops.
After the supply factors were used to understand past informations impacting supply, demand must be done in the same manner. By researching how each factor will impact demand, we can gauge the fluctuation in demand to utilize in a theoretical account to foretell monetary value. Our group found that obtaining existent Numberss for demand was impossible, so there were no concrete Numberss to compare for demand. The best manner to near the demand was to look at all the factors and seek to compare a figure to demo how much demand would hold changed. The Numberss in Figure A2.2 under estimated demand are merely in theory, and are non existent.
The theory behind these Numberss is the first factor that affects demand for java, economic sciences. Coffee is non considered a necessity like maize, wheat, milk and others. Coffee is a luxury point that has an snap of.2 when compared to monetary value. What this means is that for every 1 % that monetary value alterations, demand for java will alter by.2 % . This is really important because as supply goes down, monetary value goes up, so demand will in return go down. This helps to level demand with supply, and shows that supply has
more of an impact on monetary value than does demand. Figure A2.2 demonstrates that a really large addition or lessening in monetary value has a important consequence on demand, while a little alteration in monetary value will merely hold a little consequence on demand. In 1994 monetary value increased by 215 % , doing demand to diminish by 43 % . Even though monetary value in 2000 is back down near to where it was in 1991, you can see that demand is every bit strong as old old ages. This is true because the alterations in monetary value have since dropped in much smaller sums, intending that demand increased in those smaller sums. So it is our belief that demand has non caught up to the supply or monetary value in the past three old ages, even though monetary values have decreased. Other factors would hold kept the demand Numberss much higher than the Numberss depicted from the snap theoretical account. When we foremost determined our theoretical account without this factor, we had an overall monetary value lessening of 4.5 % .
Another factor that has influenced demand over the past 10 old ages is market penchant. It is estimated that 75 % of Americans drink java, with 54 % imbibing at least one cup per twenty-four hours. There is really small room for growing in the American market. Most other markets in South America and Asia are at the similar point. In these states, the ingestion is lower due to hapless economic conditions. It has been found that in these states the wealthy sector drinks approximately at the same per centum as Americans. This demonstrates that markets are near or already at their soap capacity for java ingestion. The lone factor that would increase java drinkers in these states would be if the wealth of the state increased. The lone wealthy markets that are increasing java ingestion are in Europe. Coffee is easy replacing tea in Europe, which will be discussed in replacements. The estimated addition in demand because of the European market is a 5 % addition.
Substitutes for java can tap into the java market and decrease demand. The recognized replacements for java are tea, soft drinks, cocoa, and intoxicant. Tea, soft drinks, and chocolate all have caffeine in them, the same drug that has made java popular. Tea was the popular drink around the universe until Americans began boycotting it before the American Revolutionary War. After this java became the preferable drink in the Americas and is now catching on in Europe despite the popularity tea has enjoyed. Coffee ingestion has been increasing in Europe because of the Americanization of foreign states. Many states see American civilization as a manner of life, so many have begun accommodating to coffee alternatively of tea. It is estimated that java has increased about 15 % in European states in the 1990 s, so even though tea is a replacement, java is winning this conflict in demand.
Soft drinks on the other manus have had an opposite affect on java ingestion. While the figure of java drinkers has increased in the U.S. , the figure of heavy java consumers has decreased. This has been largely due to the busy life manner of Americans, where convenience is a precedence. Besides, soft drinks are really similar in monetary value. The mean cup of java costs $ .10, and the mean can of dad costs merely $ .16. Chocolate, though a replacement is normally non in a drink signifier, so it has little to no consequence on java demand. Alcohol as a replacement comes into drama because in Islamic states, intoxicant ingestion is out. Coffee has served for 100s of old ages as an acceptable replacement to alcohol in these states. This is why Muslim states drink much stronger java than do Americans and Europeans, because they want more caffeine as a utility drug to alcohol. Our group feels that while the figure of java drinkers has increased, the overall sum of cups of java has decreased in big portion because of the handiness of soft drinks. Therefore, we are foretelling a 2 % lessening in demand.
The last factor that affects demand is the quality of the bean. While we are looking at the overall java supply and demand, each type of java and state has its ain spirit and quality of java. Since we are purchasing Arabica java, this will come into drama. Arabica java is considered to be the better spirit java over Robusta or Liberica because it is much smoother. So when we are looking at demand for java, we must include a 2-3 % addition in demand, because demand for the java that we are traveling to purchase is more popular than other java.
Table 1
Supply % Change Demand % Change
weather -2 % substitutes -2 %
stock list degrees 4 % perceived choice 3 %
engineering 3 % consumer penchant 5 %
disease -2 % monetary value change/ snap *1 %
crop times 0 % net alteration 7 %
production degrees 4 %
Net Change 7 % ( *based on a 4 % lessening in monetary value )
Since we believe the monetary value of java is chiefly affected by supply, we took the entire 7 % for supply and.2, or the snap of demand, times the 7 % addition in demand, for an overall demand addition of 1.4 % to come up with a 5.6 % addition in supply. This would ensue in a 4.6 % lessening in monetary value for April. The January monetary value of $ 67.85 cents/lb. at a 4.6 % lessening would give us an April monetary value of $ 64.05 cents/lb. With a 7 % addition in supply, we estimate a supply of 114.7 million bags, similar to the 115.1 million bags estimated by the USDA. The R squared for foretelling the current old ages monetary value with current old ages supply is 0.55. This means that our group is 55 % confident that monetary value will travel with our predicted supply. This is illustrated in Figure A3.1
While we feel comfy with these figures, it is besides required to look at last twelvemonth s production when seeking to foretell the monetary value for an April purchase. If you look at Figure A3.2, you can see that monetary value is most dependent on the old old ages production and the current stock list degree. The arrested development theoretical account gives us a 0.8 Roentgen squared. This is because in April, before the following old ages harvest, a purchaser is still purchasing from the old old ages harvest. A expression at the twelvemonth 2000 s production plus 2001 get downing stock list shows that supply increased by 5.68 % . Using this information we would hold:
Table 2
Supply % Change Demand % Change
5.68 % 7 %
This gives us a alteration of 4.28 % in monetary value based on 5.68 ( 7*.2 ) . Using this twelvemonth s monetary value on January 25 of $ 67.85 cents/lb and diminishing this by the 4.28 % , we come up with a monetary value of $ 64.95 cents/lb.
Now these two monetary values bring us to our biggest quandary, which one to utilize. As antecedently mentioned, monetary values in April seem to be based off of last twelvemonth s monetary value, but it is still affected by what the predicted crop of that twelvemonth will convey. So for simpleness interest, we decided to take the norm of the two monetary values for the cardinal monetary value. The mean monetary value is $ 65.50 cents/lb, so the cardinal monetary value analysis for java has predicted a monetary value of $ 65.50 cents/lb for April 25th.
Technical Analysis
The first measure in the proficient analysis was to chart the hard currency monetary value informations from the past 10 old ages in order aid place which calculating theoretical account to utilize by looking at the form of the information. The graph can be seen in Figure A4.1. The graph shows no noticeable tendency. A TSN analysis was done following to corroborate whether or non there was a tendency. The consequences from the TSN analysis can be seen in Table A4.2. Since the consequences of the TSN analysis show over 20 per centum noise, a less complex prediction theoretical account should be used since a big part of the fluctuation can non be explained.
However, we were non comfy with the consequences of the analysis since a big per centum was a tendency. We so performed a TSN analysis for the past three old ages to see if it would give us different consequences. However, the analysis still gave us a big per centum of noise. This narrowed down the prediction method possibilities to a simple moving norm, a leaden moving norm, or the na ve method.
The consequences from the norms and na ve method are in Table A4.3. The na ve method is best since it produced the lowest overall mistake. The two-month leaden traveling mean mistake was really near to the na ve mistake. However, the two month weighted traveling norm was about a na ve prognosis since the weights of.9 ( w1 ) and.1 ( w2 ) produced the best consequences. To corroborate that the na ve theoretical account would be best, we besides analyzed informations from merely the past three old ages utilizing the norm based theoretical accounts and the na ve method. The na ve method still proved to be the best theoretical account.
We believe that the na ve theoretical account was the best method because of the uncertainness of the fluctuation, the nature of the market for the trade good, and the clip frame. The fluctuation of the java supply and monetary value depend on the conditions, disease, natural catastrophes, and authorities ordinances. Therefore, a tendency form is non likely. The monetary values in the hard currency market for java have been comparatively stable in recent old ages due to the consistence of the market conditions. Last, since we merely are calculating four months in progress, the monetary value is less likely to dramatically fluctuate month to month, which makes the na ve theoretical account best. Using the na ve method, our forecasted monetary value for April 25th is $ 64.39 cents/lb.
Recommendations
The first concern with our recommendation of when to purchase java centres on which monetary value to utilize, the cardinal monetary value or the proficient monetary value. Our group decided to average out the cardinal and the proficient monetary value. The proficient we know will hold some mistake because it is na ve and the April monetary value is the forecasted January monetary value. The cardinal on the other manus has better truth harmonizing to the tendency analysis and R squared value, but with demand Numberss merely estimated, these Numberss can be slightly hazardous. The forecasted monetary value that our group came up with is equal to 64.95 cents/lb on April 25th. By utilizing this forecasted monetary value, three different options can be looked at to find when we want to purchase the java and if a hereafters contracts will be necessary. All three options are illustrated on Figure A5, so non all values will be addressed in the study
Option figure one dealt with purchasing in the hard currency market on January 25th at 67.85 cents/lb. In order to make option one, we needed to change over our figures because our monetary value was in cents/lb and purchasing options in the hard currency market are merely sold in 60 kgs bags. The transition grade for pound to kilograms is 2.2, so we foremost divided the $ 500,000 allotted to purchase java by the monetary value per lb to acquire a entire figure of lbs that will be bought. The 2nd measure was to take the entire lbs and divide those by the 2.2 to come up with how many kilograms $ 500,000 can purchase. This figure was so divided by 60, because this is the sum of kgs that the bags are sold in and came up with a sum of 5,583 60Kg bags that we are traveling to buy. With these Numberss we were so able to happen the entire monetary value for option figure one by taking the $ 500,000 spent and multiplying it by the 2 % keeping cost per month times three months and came up with a entire cost of $ 530,000 dollars to buy 5,583 bags of java.
Option two trades with purchasing the hard currency merchandise on April 25th. Since our group has predicted a monetary value bead in the hard currency market for java, this has a lower monetary value than option one. With our forecasted monetary value of.6495 cents/lb, it would be $ 478,629.54 to buy 5,583 bags of java utilizing option figure two.
The 3rd option is to purchase in the hard currency market on April 25th and to purchase a May Futures contract on January 25th and sell it back on April 25th. This is referred to as long hedge. By holding the hard currency monetary value bead 2.90 cents/lb utilizing the Jan. 25th monetary value minus our forecasted April 25th monetary value, we would salvage $ 21,370.68. If we bought a hereafters contract on Jan. 25th for 70.55 cents/lb and assumed that it would be deserving our forecasted hard currency monetary value of 64.95 cents/lb on April 25th, so you would lose $ 41,267.52 on the hereafters contract. The entire loss through hedge would be $ 19,896.84 plus a $ 2,500 committee for the purchase and merchandising of the hereafters contract and you have a entire cost of $ 522,396.84 to buy the 5,583 60Kg bags of java.
As you can see, option figure two would be the recommended option, as it is about $ 44,000 cheaper than the following best option, option figure three. In order for option figure three to be better, java would hold to lift to $ .702 cents/lb, which was found by utilizing breakeven analysis. Based on the standard divergence of.29 cents/lb from the past three old ages of hard currency monetary value informations, the chance of java lifting to $ .702 appears to be great in April. However, we are really confident with our prognosis and are traveling to remain with option figure two. We strongly believe that the monetary value of java will fall, non rise.
