The absurdity of the C

April 8th, 2012

Over the last couple of months I’ve started paying more attention to the ‘C’ price for coffee.  This is the price paid for coffee in the Intercontinental Commodity Exchange (ICE).  Now, only a small amount of coffee gets traded through the ICE but the price paid is important because it acts as an indicator.  For anyone involved in coffee production it is a measure of what that coffee is worth now.  Often a differential is paid, a premium on top of the C price – perhaps based on the coffee’s country of origin.

In the past prices paid to producers for higher quality lots were usually a lot more than the C but still tied to it, often in the form of a differential.  For this reason, when coffee’s C price spiked they had an impact on every price paid.

Looking back historically you can see prices were depressingly low, then stabilised around the $1.20 mark and then in the last two years things spiked dramatically.

The more you watch the ‘C’ the less comfortable you get with its existence, because it doesn’t really seem to be a very sustainable way to do things.  I understand the concept of the open market, of abundance and scarcity affecting price.  As you watch the C you realise that perhaps, perhaps these things have an effect on macro movements but in the day to day they really matter very little.

Looking at this chart you would think that a growing global demand, against generally insufficient supply would push prices up.  You’d also understand that Brazil having a great crop this year – to the extent that we may have a surplus – would surpress prices.  Often though you see price movements based on a host of other factors.

To give you an example of this:  On March 22nd coffee’s price fell by 8cts, to a recent low of 174.45.  This rapid drop was caused by data released concerning Chinese and European manufacturing and its decline.  News that China’s manufacturing activity had declined for the 5th consecutive month had an impact across all commodities that day, rather than coffee specifically, but that still doesn’t make one feel any better about the fact that for producers the price is massively out of their control.  You could argue that given enough money, you can influence things.  I read a little about rumours that Brazil’s government was looking to lend producers money to prevent them selling when the market was too low and wait until prices improved without immediate pressure.  This seems like a relatively difficult thing to pull off if you don’t have one of the largest economies in the world.

As purchasers of coffee, we’re generally able to control our sale price.  If our cost of goods goes up, we maintain our margins and our retail price increases accordingly.  Impacts of spikes in coffee’s price can be dealt with, and we are able (in theory, anyway) to run sustainable businesses.

Back to producing coffee – we should probably look at the other major impactor on the economics of this: the cost of oil.  This is a pretty good metric for looking at how the cost of production may change year to year, month to month, or even day to day.

With oil we see massive fluctuations.  I’m aware that oil affects us, that it affects the cost of goods for many businesses.  It doesn’t really reflect the changing cost of coffee though, because that baseline price has become so disconnected.

I am aware, writing this, that I still know very little about commodity trading, about why we have ‘C’ price at all or why we remain so wedded to it.  I don’t know if it is possible for organisations in producing countries to produce a price indicator – calculated on the price of production, as well as a margin in there too.  This kind of thing is way above my pay grade but using a moving average of crude oil’s price across the period of time where producers are typically putting in a lot inputs may give some insight into the cost of production in a particular country at a particular time.  This would give some level of predictability – because as a producer you know that the cost of production may vary but your margin will remain reasonably intact.

Surely something that is at least sympathetic to the unique conditions rather than tied to global macro-economics would allow a more sustainable industry.  The free market would end up having an impact on the prices actually paid – but I’d rather look to an indicator that is relevant.  The ‘C’ is not a good thing for coffee, but we’re currently stuck with it because – as an industry – we choose to be.  I suppose this is because it suits those with the largest financial interests more often than not, but I don’t know how we can talk about sustainability long term when we are at the mercy of such wild swings and unpredictability.

Within specialty I expect more producers to begin to work in a way that is less bound by the ‘C’.  Long term I don’t see the ‘C’ staying high, because technology will rise to meet the demand for commodity coffee.  Speciality will likely split in its pricing structure, but I don’t really know what kind of timeframe we’re looking at for this.  Writing this is mostly about getting various thoughts out of my head.  I may well have just made myself look pretty stupid and ignorant, I just don’t know… I’d love some input on why my ideas are stupid, or why the ‘C’ is good for coffee.  For that reason I’m going to open up comments on this post. 1

  1. I would ask that comments stay on topic – not about the fact that comments are not open on other posts.  Thank you.  ↩︎

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