The Speciality Coffee Crisis

This isn’t designed to be a fear-mongering post, but this is really something we have to talk about and think about as an industry.

I think we can accept as fact that the growth in consumption of high quality coffee is not being matched by growth in production. At some point in the not too distant future there will be a tipping point where total demand starts to comfortably exceed total production and this will result in a dramatic price spike.

How dramatic that price spike will be it is hard to say. It will certainly be more dramatic than the one seen in commodity coffee right now due to the competitive nature of the speciality industry, combined with free market supply/demand economics.

Great coffee is going to get a lot more expensive. This is, from an ethical point of view, no bad thing. We’ve talked, as an industry, for a long time about the price of coffee being too low and that is going to change. What we really need to start thinking about is how we plan to deal with that change when it comes. It is going to affect absolutely everyone in the industry.

Most obviously coffee roasters – and there will be two choices: keeping buying speciality (and end up paying 2-3x what you are paying now for a lot you want) or buy lower quality commodity coffees. Buying more expensive coffees means your wholesale and retail prices will have to increase dramatically. How will you approach this? Will it cause a dramatic loss of business? Are you going to be able to deliver value for money on higher priced product?

It will affect cafes too. If you want to serve better coffee than your competitors then you’ll have to pay dramatically more for it. This will push up prices for coffee you brew and retail. Will you be able to communicate why a customer should pay more? Will you be able to compete against other businesses buying and brew top quality? Will your drinks still be good value for money when their prices have to increase in a more dramatic fashion than any previous price changes you might have brought into effect?

The theme of the above is, of course, value. If we’re struggling to deliver value for money now – how successful will we be when prices jump?

While I do want to see coffee prices increase and growing sustainable, excellent coffee to be an increasingly profitable business – I’d like to see these changes occur at a pace that the whole industry can keep up with so that Speciality continues to grow healthily. Equally I’d like to see more coffee producers earning sustainable prices for great coffee – rather than have an ever widening gap between speciality producers and ‘the rest’. I don’t want to see Speciality hit a wall or even start to shrink back again.

So what can we do?

I’ve mentioned the Global Coffee Quality Research Initiative (GCQRI) on here before. We understand an embarrassing fraction of what we need to when it comes to growing better coffee. We need to increase production of great coffee, but we don’t really know how to do it effectively – be it planting in new areas, or increasing quality of coffee already being produced. This initiative aims to work on that problem. It isn’t just nerding out over coffee science – this is important work with huge potential impact. Next week I go to Texas to take part in the Congress there, and I will try and share as much as possible. I’m not fund raising or anything like that – but I do think this program needs as much support as possible globally – not just from US companies – as it is relevant to all of us.

They have set up a simple website here, and as the project gets going I am sure the online presence will grow as well. Do get in touch with them, do please support this. If people have questions, ideas, thoughts or anything to add – please do leave a comment.

20 Comments

  1. James, this is extremely interesting and important. Thank you! I am getting quite a coffee education from your blog. I’m almost embarrassed to admit this, because it seems like I’m behind the times, but I’ve been trying to articulate what I see as a dual-track trade in coffee, and you’ve established them so well as commodity and specialty. When I read that I said “Yes!” aloud. I must say that I really appreciate the breadth and depth of your blog. Coffee is fascinating, and I am so pleased that you take the time to analyze and discuss multiple aspects of it–it is very informative and stimulating. Furthermore, it is encouraging for someone who works in specialty coffee, not as a bartista or roaster or green buyer, but nevertheless feels that this is indeed an exciting industry.
    Thanks again, and please keep up the good work!

  2. Hi James,

    It’s not just a specalty coffee crisis. I attended the NCA Fall Conference here in New York last week, and one of the talks was about the green coffee market. Apparently total worldwide consumption will outstrip production by 5 million bags in 2012. When that happens, the price of commodity coffee will skyrocket, leading our prices to jump as well.

    I’m going to post something about this on my blog tomorrow, as well.

  3. James,

    To say that the growth in consumption of high quality coffee is not being matched by growth in production is both accurate and misleading. Similarly, the idea that the future of Specialty coffee involves dramatic price spikes is also accurate and misleading. I guess it all depends on if we are using current buying practices as the status quo for the future of Specialty coffee.

    Sure, companies that are sourcing from offering lists (not a judgment, I do it, too) might be dissatisfied with both the quantity of high quality green coffee they are able to find, as well as the framework within which they are working, that is, ‘someone else’s buying decision’. In this case, yes, the future of Specialty coffee holds dramatic price spikes akin to what we are seeing in the commodity market, as these coffees are almost always sold at diffs relative to the C, and competition for them will become more fierce. Still, to think that this is the future of Specialty coffee is near-sighted. In the long future of Specialty coffee, I don’t see the expense coming from the alignment with the fluctuating commodity market. That is… Specialty coffee is not doomed to sit in the backseat and buckle up for the bumpy ride.

    The current spikes in the C market are artificial, based on speculation and aggressive external factors, but they will not be sustained over time. This is dangerous for quality. I see the future of Specialty coffee to be much more substantial, based on the fundamentals of production costs, better farm management practices, qualitative pricing based on consensus based cup scores, etc. Companies are already doing this, I’m already doing this, but I think it needs to happen in much higher quantities if we, as an industry, are going to protect the future of Specialty… especially as exchange grade coffee becomes more and more limited for at least the next year, and commodity prices continue to be on the fluctuate for the foreseeable future. To me, there is one likely outcome that is at the heart of the future of quality…

    The supply of tenderable exchange grade coffee is diminishing, and doesn’t look likely to recover for at least the next 2 years. The world has been pressuring Colombia to meet their quota for washed milds. Colombia, in turn, incentivizes producers to grow high yielding, disease resisting, low quality varietals. There is even a move toward the introduction of mechanical harvesting to increase efficiency. While the market is high, this bodes well for producers all across the quality scale, and it becomes a real issue for us to convince a producer to spend more resources on the production of high quality coffee, while his/her margin over their neighbor is diminishing because of higher internal prices.

    Meanwhile, global consumption of coffee in general (not just Specialty) forces the need for more tenderable coffee, and we already know that production will not increase in the next two years. So how do we increase the supply of stock? One option currently on the desk of the ICE board is to tender Brazilian washed and semi-washed coffees to the C contract. While there are differing opinions as to whether this is a good idea, I believe that it will flood the market, cause speculators to leave as quickly as they came in, and prices will tank. What does this mean to quality? Well, let’s take those producers in Colombia that we lost to the inflated prices. They are stuck with low quality varietals that we don’t want, and they can only sell to cooperativas. For decades.

    We all know that there is a lot of potential out there, but perhaps the Specialty market isn’t present or involved enough to support and secure our ideas of what Specialty is. There are plenty of producers who are producing _someone’s_ idea of ‘high quality’ coffee, although, as is often the case with preferences, it happens to be of a much lower in quality standard than we would like to see. We know that what needs to happen is more direct communication and commitment from buyers in order to support a producer’s shift to what we consider more appropriate production methods for producing quality coffee. It’s one thing to deny a sample, but another to indicate why. Similarly, it is one thing to ask a producer for more precise harvesting of ripe cherry, but it is another to offer a perspective, “If you pay by the day rather than by the kilo, you might accomplish this, and I’ll support that.” Finally, to think you can do it alone is silly. We need a strengthened supply chain to make this happen, and there is no I in team.

  4. Great post, James…
    Another outcome of a price spike will be a temptation on the part of quality focused roasters and retailers to adjust their already subjective opinion about what great coffee is in order to widen the field of play in their favor. I believe such a shift would be more subtle and subconscious as an industry.
    To guard against that then, the question we should also be asking is, How do we maintain our current level of integrity and discernment of what quality coffees actually are (afforded by our present lower price luxury) in the midst of crisis that tests the metal of that opinion?

  5. Hi James:

    Great post. Here’s my long-winded two cents (for the very little that they’re worth):

    According to basic supply and demand, the niche (specialty) market should actually experience significant growth on the supply side from the price spike. Of course, as resources are limited often in growing countries for a quick shift in supply to actually occur, there are several possible outcomes:

    –Prices will rise to a point that makes offering specialty coffee at a competitive price near impossible, as you suggested in your post.

    –Or companies (specialty roasters or specialty importers) and farms will recognize the scarcity before it occurs and pour investment into improving the quality of coffee at farms that aren’t quite “specialty” yet. This will help decrease the slope in the supply side curve, allowing quantity to grow. The price will still go up significantly, justifying the initial investment for the companies and farms involved.

    Option one intrigues me as it seems likely we’ll experience a period of time in this arena before supply catches up. Fortunately, I think there are several factors in specialty coffee’s favor: coffee’s inelasticity, and the rise in commodity prices.

    Coffee has proven an extremely inelastic good in previous price changes. Some estimates I’ve seen for processed coffee (what we could call the commodity market) show the elasticity of demand ranging from .1 to .5. This means the global coffee trade should experience a remarkably small decrease in demand as a result of any rise in coffee prices.

    Alternately, with a shortfall of five million bags in 2012 as suggested above, the price increase could be quite significant for commodity coffee to again reach equilibrium. If commodity prices increase significantly (as they would with a supply shortage), then an increase in specialty prices could occur alongside it with little fall in demand.

    Option two is inherent in the long run if prices spike as suggested in option one, but do not slow specialty coffee’s growth. This option is interesting as it must be coupled with sustained growth or it could have negative repercussions.

    Additional investment and a focus on growing high quality coffee has significant costs associated with it. To justify the expenses and additional costs associated with growing specialty coffee, prices would have to remain at the point they had grown to, or at the very worst where they are today. But if what we are predicting as a shortage spurs too much growth, followed by better crop yields we will see prices drop significantly as a result of growth in supply.

    The GCQRI could be instrumental in ensuring sustained growth throughout and beyond the imminent price change if they focus on as they say on their blog: “increases in overall coffee quality per se are also necessary to help reverse the consumption stagnation that has long plagued the coffee industry.” Too much focus on increases in total supply without this focus on increasing demand could be dangerous.

    Anyway, all that’s to say that I’m really excited to hear about this initiative and thought I’d explore the topic here to see what others are thinking about this, particularly surrounding the idea of increasing supply in an industry where estimates and shortfalls can often be the result of a bad crop yield and high increases in coffee supply have had extraordinary consequences in the past.

    Best,

    Conor

  6. Thank you for this great comment.

    A few things – I don’t see the supply/demand relationship in speciality tied as much to commodity fluctuations (though you rightly highlight how that is the case.) I see it also in dramatic organic growth. Be it in my own company or in Gimme, or a myriad of other roasters who want the best they can find. These companies generally offer great product and as such are successful.

    In terms of conversion – improving the quality of existing coffee – I don’t think enough information is available to either producers or greens buyers. We know ripe is good. In terms of requests perhaps for specific fermentation times or techniques that can have a significant and immediate impact on quality – or drying times and techniques as another example – I don’t think we know enough which is where the GCQRI is going to be very important.

    I think roasters who have built long term relationships have a distinct advantage – something I am definitely jealous of – when it comes to the next few years.

    On a separate note – the tendering of Brazillian coffees on the C is quite scary. As I understand it (read: not very well) the size of the Brazilian crop has an inevitable and expected impact on C without needing to be tendered through it.

  7. I think the problem we have is that in order to react effectively (option two) we have to know how to immediately impact the quality of large amounts of coffee that is currently falling below speciality grade.

    Lots can certainly be done with post processing – better prep as an example – but is information about bumping quality from all aspects available and easily disseminated? We need it to be in order for Speciality to keep its current growth track going.

    What I just don’t know is how quickly change is likely to happen, and in what order of magnitude. Interesting times ahead….

  8. Shouldn’t we distinguish between types of specialty coffee?

    1. Lower grade specialty coffee are fairly abundant (the 80-85 range on the SCAA scale – the one’s that taste good, we can say a few interesting things about them, most people will enjoy them, but they won’t change anyone’s life.)

    2. The special microlots, certain Kenyas, those well marketed Ethiopians DPs, and the CoE coffees that retail for $20.00/lb+ and typically cup in the upper 80’s if not in the 90’s; the ones we consider selling our houses, dogs, and cars for; the ones that even years later we still remember tasting them, where we tasted them, and what song was on in the cafe when tasted them.

    Group 1 is more closely connected to the commodity market and depends mostly on picking ripe cherry at a decent altitude. Group 2 is connected to those elements that need more science/experimentation: fermentation, terroir, varietal, etc. Group 2 will get more scarce unless we learn more. Group 1 will depend on the C and spreading basic and better agriculture practices.

  9. The absent voices from a discussion about pricing and scarcity are those who actually understand the market well, and have experience with the history of peaks and valleys since the ’90s. I imagine they would be having a nice deep belly laugh at an attempt by buyers like all of us here (assuming Dub Hay isn’t reading this) to speak to the broader issues involved with hitting a ceiling in terms of volume, at whatever price and quality level we are talking about. The problem is in that; what Green Mountain is concerned about with meeting their buying targets in price and quality has some vague relation to the concerns of small roasters, but only in the abstract. There are good arguments that there needs to be research in coffee quality, I am just not sure that the scarcity of quality is the best one. That you can’t get 2 vac packed boxes, or 12 x 100 kg grain-pro bags, or 85 jute bags of what-have-you is not plausible. Placed in the framework of arabica coffee production, we are speaking on the molecular level, and we can’t conflate one with the other. Yes, good coffee will be more expensive as it truly reflects the costs to produce it, to micromill it, and to import it in a mixed box with 37 other microlots that each have a separate ICO number. And when a buyer rejects their 87 point “relationship coffee” because it should be an 89, that costs too. I can see the costs for any importer even wanting to touch microlots going much higher in the short term. I think those issues are real and immediate.

  10. Colleen:

    Thank you for your wonderful comment. I am particularly grateful for the following passage, which finally brings the farmer perpsective into this important discussion: “it becomes a real issue for us to convince a producer to spend more resources on the production of high quality coffee, while his/her margin over their neighbor is diminishing because of higher internal prices.”

    All of the talk here — and what I have seen of the discussion of GCQRI — has been focused on what is good for the market end of the coffee chain. There has been comparatively little thoughtful discussion of what the incentives are for increased investment in quality at farm level, and — far more importantly — what the returns on that investment are for smallholder farmers. The fact that many farmers are opting to save the time and energy necessary to qualify for quality premiums seem to indicate that the return may not be as compelling as the champions of GCQRI suggest they are.

    Michael

  11. James:

    Thank you, once again, for a thoughtful and provocative post about a very important subject. I am grateful that folks like you will be involved in the discussions in Texas next week, and hopeful that you will find space to amplify your reflection here on the concept of value. You focus here on value at the market end of the chain. What I have found lacking from discussions of GCQRI to date is a similarly thoughtful consideration of value at the farmer end of the chain.

    The standing developmental justification for smallholder farmers to invest in quality is a formula equates quality of coffee with quality of life: higher quality = higher prices = higher standard of living. I have found this formula to be more notional then evidentiary. I don’t mean to suggest that there isn’t evidence to document higher prices. Such evidence does exist, and thanks to the leadership of a few progressive roasters committed to transparency, it is increasingly available to folks who care to see it. Rather, I think I remain unconvinced precisely the value issue you raise: the price a farmer earns is not equivalent to the value of quality coffee to smallholder farm families.

    Colleen’s comment above gets at the value of quality premiums to smallholder farmers better than anything I have seen to date in these discussions. The incentives offered by quality obsessed roasters are often no longer sufficient to compel farmers to make additional investments of time, energy and cash in achieving the quality differentials that qualify for premiums. This seems to me to suggest that the value of quality to smallholder farmers may not be as great as GCQRI’s champions suggest.

    For the record, I think GCQRI is a very good initiative that is long overdue. I also agree with the initiative’s authors that the return on investment at the aggregate industry level could be significant. But if the industry is to live up to its own high standards for sustainability, it should also analyze the distribution of those returns – are they concentrated at the market end of the chain or do they also create real additional value in the lived experience of smallholder farmers at the other end?

    Safe travels and I look forward to reading your reflections from the meetings here in the coming weeks.

    Michael

  12. James, great blog, keep up the great work.

    I just read through the GCQRI slide show, and perhaps I’m missing something, but is there a plan to fund the implementation of these best practices once they are discovered? The presentation uses an example regarding “Potato taste defects in E Africa.” The GCQRI-proposed solution is, “New dry processing equipment with ‘potato laser beams.” Does GCQRI aim to help fund the implementation of their recommendations, or will producers be expected to trust, fund and incorporate GCQRI practices on their own. This raises not only the obvious issue of money, but also a matter of trust. Will coffee producers in 2nd-3rd world countries trust to invest resources – that they largely don’t have – in ideas from the developed world. Has the last 100 years of coffee trading produced a trusting relationship between buyers and producers? Do growers feel they’ve been treated justly, and will likely welcome ideas from the other end?

    As a roaster, I feel that any program aimed at responsibly increasing the production/quality of specialty coffee is a positive thing. And again, I apologize if I missed it, but implementation is perhaps the largest hurdle to be cleared, and it appears to be missing from GCQRI. If we’ve learned anything from our post-modern dealings with trying to “fix” things in other countries, it should be – discovering solutions in our offices/laboratories is the easy part; implementing these ideas on foreign soil is a whole different animal.

  13. Implementation was something that came up a great deal while we were all in Texas.

    I think it is unrealistic to propose the GCQRI be about anything other than research. I hope that it can build and maintain great relationships with those organisations that do the outreach and implementation work, so that the research is used effectively. There are organisations in every producing country doing work, and I think that infrastructure is the best option to spread findings.

    While research may still be relatively easier – it is no less valid, and still requires funding and initiative to make it happen. I don’t think it is, or could be, an either/or situation. I think that there is sufficient awareness within the organisation that it won’t just dump dry science on the market, printed only in English to collect dust and be of no use. I think we all want it to be effective so I think it will be shared effectively and with some forethought for its use.

  14. In the event of specialty coffee prices increase dramatically, coffee growers will produce more specialty coffee as they seek higher profits. Then, production will meet consumption and prices will stabilize at a competitive rate. A price spike would not be long-term.

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