COFFEE AND THE MARKET
If you've been watching the headlines, chances are you've heard that coffee prices are rising. Wait, let's try that again with the appropriate emphasis.
Coffee Prices to Skyrocket - Your Cup of Coffee Just Got More Expensive Here are just a few of the headlines we've seen in our newsfeed in the past couple of months: Brace Yourself for Higher CoffeePrices Due to Costlier Beans Kraft Follows JM Smucker, Ups Coffee Prices Can't Live Without Your Morning Coffee? If So, It's Going to Cost You More In fact, since the early spring, a number of major coffee companies have announced that they'll be raising their prices due to the rising prices for green coffee beans. They include JM Smucker, Kraft, Starbucks and Dunkin Donuts. You might notice that those are all major corporations that place coffee orders by the ton rather than by the pound. Nevertheless, a lot of the factors that affect the prices for coffee on the commodity market will also affect prices on the specialty market, even for those roasters who buy their coffee through direct trade.
COFFEE AS A COMMODITY
In most cases, when you see headlines about the price of coffee, they're talking about the price on the commodities and futures markets, where coffee is traded just like sugar, corn and pork bellies. Specifically, coffee is mostly traded on the New York Board of Trade [NYBOT], the Kansai Commodities Exchange [in Osaka, Japan], the Singapore Commodities Exchange [SICOM] and Euronext [London]. It's one of the most volatile commodities to trade, in large part because there are so many undefined variables that can affect the production of coffee. All it takes is a few days of cold weather or rain at the wrong time to completely decimate a season's coffee crop. Investors are well aware of this, so even a vague rumor about bad weather can be enough to spark a coffee trading frenzy on the commodities markets - and that trading frenzy drives the prices for green coffee higher and higher.
HOW COMMODITY EXCHANGES WORK
Disclaimer: This is a very, very simplified explanation. If you want a deeper view, check out this article at Small Farmers, Big Change. Like any goods, the price of coffee - or any other agricultural products - is based on the current supply and demand. If there's enough supply to meet the demand for a product, prices will be lower. When supply is lower, buyers are willing to pay more for the product. When supplies are really plentiful, farmers are often forced to accept prices that may not even cover their production costs. Since agricultural production is so much at the mercy of the weather and other factors outside the control of farmers, commodities exchanges and futures contracts help provide a little security to both farmers and those who buy from them. Imagine, for example, that you are a coffee farmer and you anticipate that your farm will produce 1,000 pounds of coffee this year. The coffee will cost you 75 cents a pound to produce. The current market price for coffee (not the coffee we buy) is $1.05 a pound, but your coffee won't be ready to ship for six months. A lot can happen in those six months, so when a trader approaches you and offers you a contract to buy all the coffee you can deliver, up to 1,000 pounds, at a price of $1.25 a pound, you have a sure profit of 50 cents a pound for your crop. The trader, for his part, has ensured that in six months, no matter what the going price is for coffee, he will pay $1.25 per pound for your coffee. You both have injected some certainty into your positions, which makes it easier for you both to stay in business.
COMMODITY TRADING GONE WRONG
Unfortunately, there's a wild card in this scenario - and it's not the weather. It's the traders on the market. Very few of them are farmers and coffee roasters. In many cases, those who are buying and selling futures coffee contracts are traders who have little interest in coffee other than as a vehicle for profit. They may never set foot in the country of origin. Instead, they spend their time watching the weather, analyzing perceived demand and making educated guesses about the price of coffee six months out. If a trader believes that there will be a shortage in six months -- thus, higher prices for coffee -- he'll hedge buy coffee contracts at today's price with the anticipation of selling those contracts at a profit when the time comes. The very fact that he's buying up coffee contracts - future coffee production -- artificially induces a perceived shortage, driving coffee future prices higher. Reporters who cover the futures markets not the rising price of coffee futures and report that you can expect coffee prices to go up. The roasters we work with don't buy their coffee on the commodities market. Instead, they buy through a variety of other schemes, including Fair Trade markets, trading directly with coffee farmers or coops and buying from importers who engage in Fair Trade or direct trade. In the next part of our Coffee and the Market series, we'll look at the differences between commodity coffee and specialty coffee, and talk about the reasons we support roasters who source their coffees outside the traditional commodities market.
In the first part of this Article, we talked about the headlines we've seen recently about rising coffee prices, and linked to a number of articles. Most of them pinned much of the blame for the higher prices on the drought in Brazil, the largest coffee-producing country in the world. Obviously, when a country that accounts for more than 30% of the world's coffee production has a very bad year, it's going to affect the price of coffee worldwide. However, the largest portion of Brazil's coffee crop goes to the commodities market. Weather problems in Brazil have a proportionally smaller effect on prices for coffee on the specialty market. There are, however, a lot of other factors that do have an effect on specialty coffee prices.
First, it's important to remember that on the specialty market, place of origin has a major effect on the price that buyers are willing to pay. Countries that have a reputation for producing high quality coffee, and that have invested in the infrastructure for growing, processing, storing and moving coffee will generally be able to command higher prices for their crops than others. Thus, you'll generally pay less for coffee from Uganda, which is less robustly developed, than you will for coffee from Ethiopia, which has invested a great deal of time, thought and energy into developing its capacity to produce high quality coffee.
QUALITY COFFEE, GREAT ORGANIZATION
These aren't hard and fast rules, though, and they're becoming less hard and less fast as individual farmers, coops and processing stations start making a name for themselves. The Cup of Excellence program has helped make a big difference in helping raise the profile of high-quality coffee producers. For those not familiar with CoE, it goes like this. Each year, coffee producers in countries with a CoE program get to submit samples of their coffee to the program. The coffees go through several rounds of tasting by regional, national and international judges, with coffees that score above an 85 advancing to the next round. After the final round of scoring, the top 10 coffees are awarded the Cup of Excellence and the right to display the Cup of Excellence seal. All coffees that score more than 90 points in the second-to-final cupping are awarded a Presidential Award, and all CoE coffees are immediately auctioned at an online auction. CoE winners can command incredible prices, and the patina of their win generally extends to other coffees from the same producer. CoE is only one of many ways that buyers reward quality coffee with higher prices. Many of our roasters make frequent buying trips to countries of origin where they taste dozens -- sometimes hundreds -- of coffee samples to find coffees that they want to offer to their customers. Better coffee can command higher prices.
Coffee is an agricultural product, and like any agricultural product, its production is subject to the whims of Mother Nature. Coffea arabica is more finicky than most. It demands a very narrow range of temperatures, rainfall at a specific time and in specific amounts and an extended dry season at the right time for optimal production. When the weather deviates even a little, the coffee tree produces fewer flowers, or the flowers don't set fruit, or the fruit ripens too slowly or too quickly, or the picked cherries go moldy before they finish drying. In any case, there's less coffee produced, and less supply means higher prices. Coffee's delicate nature makes it unusually prone to the effects of a changing climate. Many of the areas that have been big coffee producers are seeing unusual weather events -- monsoons, droughts, unusually long rainy seasons, cooler weather than usual, hotter weather than usual. Over the past few years, countries in eastern Africa and South America have been affected by these weather anomalies nearly every year.
In many coffee-growing nations, the forests that once were full of coffee trees have been stripped to make room for human population growth. In some of these countries, children of coffee farmers are opting to live in the cities where they can take jobs that offer a steady paycheck without the uncertainty of raising crops.
Anyone who has been paying any attention at all to coffee industry news has heard of roya, a fungus that eats the leaves on coffee trees. Roya has been a problem in coffee-growing regions for more than 40 years, but never to the extent of the past year. In Central America, in countries like Guatemala and El Salvador, as many as 80% of coffee farms are affected by the fungus. Those farms may see all of their coffee crops for the year destroyed, but worse -- many are losing their trees as well. It will take several years before replacement trees are mature enough for full production.
The good news is that more people than ever are drinking coffee, and more of them want high-quality specialty coffee. The bad news is that more people than ever are drinking coffee, and more of them want high-quality specialty coffee. It's a basic rule of economics: when demand exceeds supply, prices go up. In the past few years, the coffee craze has spread to countries that have always preferred tea. Coffee consumption is growing in China, Russia and India, as well as in traditional coffee-drinking countries like the U.S. and European countries.
Not all factors are negative. One of the better consequences of the specialty coffee industry's commitment to excellence is a willingness to pay higher prices for better coffee. A portion of those higher prices go into the pockets of farm laborers who tend the plants, pick the coffee and process the cherries. By ensuring a fair wage for laborers, the specialty coffee industry helps make farming an attractive occupation, which in turn helps sustain the industry.
While we're talking about rising prices, let's get a little perspective. We feature coffees from the best artisanal coffee roasters in the country. Currently, our most expensive coffee will run you a whopping $20 a pound. Using the golden ratio (15g of coffee to 250 ml of water), that's just about 30 cups of coffee, or about 66 cents a cup. That's what we mean when we talk about coffee as an affordable luxury - you can enjoy the best coffee the world has to offer for less than you'd pay for a double cheeseburger off the Dollar Menu at Mickey D's. Keep that in mind next time you see a headline screaming about the skyrocketing price of coffee.
Above, we talked about how coffee is traded on the commodities market, and how trading affects the price you pay for your coffee. In this post, we'll talk about the difference between commodity coffee and specialty coffee, and why those differences are important.
SPECIALTY COFFEE VS. COMMODITY COFFEE TRADING
If you're buying your coffee from an artisan roaster, you can be pretty sure that your coffee was never traded on the commodities market. However, the C-market price for coffee does affect the price of coffee bought outside the market. If the commodities market is paying more per pound for generally low-quality, generic coffee, those prices will force the price of specialty coffee, Fair Trade coffee and even direct trade coffee up. The C-market price is a floor for Fair Trade, which guarantees a premium above the market price, and direct traders often pay more than Fair Trade buyers. On the other hand, roasters who engage in direct trade with farmers -- especially those who work face-to-face with farming families and communities -- are often already paying considerably more than even Fair Trade prices for the coffee that they buy. Because of that, fluctuations in the price for C-market coffee isn't going to make much difference in the prices they'll pay for high-quality coffee. They're already paying so far above commodity market prices that those C-market prices would have to rise a heck of a lot to force them even higher.
SPECIALTY COFFEE - WORTH THE PRICE
Let's talk a little about why we pay more for specialty coffee. There are a number of reasons, all of them important.
- Producers deserve to make a profit on their product. This is a basic tenet of the whole Fair Trade movement. It's the Fair part of it. On the commodities market, it's not unusual for farmers to barely clear enough for their crops to pay their workers and maintain their crops.
- It promotes sustainability. When coffee prices plunge, farmers often abandon their enterprise. Some go so far as to uproot or burn down their coffee trees in order to plant a more profitable crop. When they get a fair price for their coffee, they can afford to keep producing coffee.
- The coffee is distinctive. Commodity coffee is generally gathered up in large batches from multiple farms and regions and mixed together in huge lots. The end result is coffee that is only as good as the lowest quality coffee in the bunch. When coffee roasters or importers buy from individual farms, they can pick and choose among what's available. As a bonus, you know exactly where your coffee came from.
- The coffee is better. When better coffee brings higher prices, coffee producers are encouraged to invest time, knowledge and money in producing the best coffee crop possible. Many of our roasters make this even easier by partnering with small farms and making suggestions to help increase and improve coffee production.
Of course, speculation and C-market prices aren't the only thing that affects coffee prices. In the final part of this series, we'll take a look at some of the factors that really do have an effect on coffee prices and talk about why coffee prices are rising -- and why it's nothing to panic about.