Coffee’s reliance on the US dollar could be holding it back

us dollar coffee
  • The US dollar performs an outsized role as a common currency in the trade of coffee
  • Fluctuations in foreign exchange rates can give rise to a range of challenges
  • Alternatives include digital currencies and a currency bloc – but the USD remains the most realistic option

DOUBLE-EDGED SWORDS are common in the complicated world of coffee. But the dependency on the US dollar is one that has particularly sharp edges.

On the one hand, the US dollar (USD) holds a preeminent position in global finance as the most widely accepted currency, providing a secure and dependable exchange rate for coffee traders and producers. However, its ubiquitous use in coffee trading also presents unique challenges, particularly for local markets in coffee-producing countries.

Historically, the currencies used for commodities were dictated by the markets with the greatest demand for them. In the case of coffee, financial institutions in New York served as the hub for coffee pricing and trading, leading to the widespread use of the USD.

Today, coffee is commonly priced in USD because the US is a major consumer and importer of coffee. A study by the International Monetary Fund (IMF) found that roughly 40% of the world’s transactions are in USD, whether the US is involved or not.

In some ways, this is convenient. A common currency allows for consistency in pricing and the centralisation of trade across a limited number of markets.

However, as commodity markets and the two primary coffee futures markets – the ICE Eur and ICE US – are priced in USD, the value of the currency also affects global prices and can cause coffee to become disproportionately expensive for those using other currencies.

With growing instability in global markets in recent years, coupled with wildly fluctuating prices for green coffee and soaring inflation, some believe that it’s time for the coffee industry to change. Specifically, that it needs to explore alternative options and reduce its reliance on the USD.

sacks of coffee

‘Disproportionately expensive’

Both coffee farmers and traders are vulnerable to fluctuations in currency exchange entirely outside of their control.

Although coffee prices and futures are largely determined by real-time transactions and trade of coffee, the price of coffee worldwide is also affected by fluctuations in foreign exchange rates – coffee is purchased in other currencies along the supply chain, resulting in a less favourable exchange for those who don’t use the USD. When the USD falls, commodities such as coffee and fertiliser become cheaper and increase demand internationally.

Ryan Delany, the founder and chief analyst at Coffee Trading Academy LLC, explains that despite these vulnerabilities motivating many countries to move away from the US dollar, there are economic benefits to centralising the trade of coffee using a common currency.

“It’s not in people’s best interest for every country in the world to have their own commodity exchange,” he says. “It’s in a better interest for everybody to have one exchange that everyone can kind of participate in and this way, global trade and forms of finance can be facilitated.”

For those coffee-producing countries with stronger ties to the USD – including Ecuador and El Salvador – fluctuations in the value of the USD may also be disproportionately expensive.

A more valuable USD increases the value of their coffee compared to the currencies of buyers’ markets, which can decrease the demand and export of their coffees – or cause producers to default on futures contracts in a bid to receive a higher price.

However, this may also hold positive outcomes for producers whose countries are closely linked to the dollar.

In countries such as Colombia – whose farmers and producers are paid in Colombian Pesos – a strong USD means that although they receive the same price for their coffee, a weaker Peso allows them to receive a higher net price for their coffee after currency exchange.

Moving away from the USD may enable the governments of producing countries to manipulate the value of their currency in a more favourable manner, by inflating or weakening its value. However, as Ryan explains, this often works better in theory than in practice.

“If you’re taking control of the currency away from the US dollar and towards these other local governments, you’re adding a degree of volatility and exposure there to the whims of those particular governments,” he says.

“It’s great when the currency is managed by someone whose interests are aligned with yours, and they’re good at it – but historically, that’s kind of rare.”

us dollar coffee

Is there a better alternative? 

A movement away from the USD has, in some ways, been a long time coming. There have long been plans to create a multi-national South American currency and, more recently, talk of a unified trade currency between the BRICS union as a revolt against dependency on the USD has flared up.

These currency unions may be, as Brazilian President Luiz Inácio Lula da Silva claims, “capable of helping the development of the poorest parts of the world”, and potentially result in less volatile fluctuations in currency values and hence, coffee prices.

However, most predict that such unions will create more instability in both the short and long term, devaluing the currencies of all participating members and overall, being “more symbolic than substantive”.

As these nations seek to strengthen monetary ties outside of the USD, coffee may have no choice but to embrace other options, including digital/cryptocurrencies and blockchain. Some countries like El Salvador have already adopted Bitcoin as an official currency, perhaps preempting the use of digital currency for international coffee trade.

However, some like Ryan believe that the value of these currencies can only be well regulated by being backed by other commodities.

“I think there is definitely a case to be made for some kind of other alternative currency that is either backed by gold or digitally backed by gold, or just some kind of a digital currency here that’s free-floating in some way,” he says.

For now, the best way forward is unclear – the continued use of the USD as a common trade currency may be the most viable option, but will continue to inflate tensions between competing nations, creating volatility for the coffee industry. The rise of newer, alternate currencies may transfer more economic power to coffee-producing countries, but with it will come increased or unpredictable prices for buyers.

Perhaps for now, the question is not whether reliance on the US dollar is holding the coffee industry back, but whether it can shake this reliance at all.