I’ve tried to stop making predictions, but in some ways I can’t really help it. I’ve been watching the commodity price for coffee moving around quite a lot in the last few years, and things are currently in a pretty difficult place. I thought it was worth having a look at why things might be the way they are. Here’s a very, very short summary:
In May 2011 the C-price for coffee briefly exceeded $3.00/lb. This was a great time to grow coffee and sell coffee, and doing so could be considered profitable. This price spike wasn’t simply because of supply and demand. While consumption of coffee had risen to the point where it had briefly exceeded production, and companies were digging into existing stockpiles, the rapid rises and extreme volatility in the market were intensified by general financial speculation in this particular commodity.
There were discussions at SCAA’s symposium in 2011 about the need for more coffee, and I remember hearing Carlos Brando speak about Brazil’s capacity to increase yields and produce more. 1
Over the next two years the price of coffee dropped steadily, reaching the precarious, and psychologically significant, low of $100.95 on November 4th 20132. The reason for the drop was pretty simple, there was more coffee being produced than was required. Supply had exceeded demand, and the market pushed sellers into lowering their prices.
Prices fell so low that, in many countries, it was below the cost of production. We saw strikes in Colombia3 as growers demanded more support from the government. Brazil’s government talked about trying help its producers through finance, to enable them to withhold coffee from the market until the price had recovered, which it didn’t really do4.
To further compound the woes of our industry, the impact of coffee leaf rust was dramatic on many Central American producers with massively reduced yields from many farms. This scarcity did nothing to impact the commodity price of coffee, because the reduction in coffee exported from Central America was more than made up for by Brazil, Ethiopia and Indonesia. By definition, the commodity market doesn’t really care where the coffee is from as long as it is coffee. The International Coffee Organization (ICO) estimates that from October 2013 to September 2014, supply will exceed demand by 4 million bags.
So, here begins the speculation5:
- We’re going to see less coffee from Central American producers ongoing. This reduction will come not just from leaf rust, but also from producers moving away from coffee. It is important to remember that no one is obliged to grow coffee, and I don’t think it is right to push people into doing so if it is not in their best interests. On a somewhat related note, despite massive efforts to the contrary the number of producers of coffee in Bolivia is shrinking. It simply makes more sense to grow coca – the price is more stable, it harvests more often and there is little threat of criminal repercussions. This is a decision that is absolutely contrary to the developed world’s best interests, but can we convincingly argue that it isn’t a better decision for those producers than growing coffee.
- Hopefully the demand from speciality will drive the prices for high quality coffees up, ideally to the point where growing good coffee is sensible and sustainable.
- We’re going to see more coffee from Colombia. It seems like the rust resistant varieties are starting to kick in, and Colombia’s production is up. What is interesting is that the differential for Colombian coffee, the varying premium that certain countries get above the C, has decreased recently. I am not saying they are directly linked, though differentials are as much about reputation as they are about quality, and some would argue countries like Costa Rica got undeservingly high differentials once quality from other Central American producers caught up.
- Brazil’s production is going to be sufficiently large that it will continue to squash the commodity price. The 2013 crop is considered to be an “off” year in Brazil’s biennial production cycle, leading to speculation that the 2014 crop will be very large. There is, inevitably, a sort of public denial of this because confirming it will only keep prices low. Most banks and financial agencies seem to be talking about it being a big crop, and the presumption seems to be that the market will stay low. I would say that it is unlikely that the price will sink below $1.00/lb, but I’m sufficiently aware that no one has ever really been successful in predicting the movements of financial markets to not be too sure of myself there. 6
What does this mean for speciality (again, more speculation)?
- Supermarket/grocery store coffee is going to remain pretty cheap. I would expect it to increase with inflation/cost of living but to look increasingly cheap compared to speciality. Cheap drip coffee, cheap espresso, will still be around.
- Wholesalers of lower quality coffee will once again be able to leverage free-on-loan equipment more aggressively, as it will be easier to hide the margin necessary in the price of the coffee. Good news for businesses who don’t really care about their coffee program (by which I mostly mean restaurants – for which I don’ t really blame them), and I suppose good news for espresso machine manufacturers…
- Roasters, and coffeeshops, will have some decisions to make. With the gap between speciality and commodity likely to widen then the choices may be to go premium, to go mass market or to try and bridge both. The latter is the approach tried by many in the past and it seems to be difficult to genuinely achieve – with many ultimately doing the bulk of their business on a lower quality tier.
- Those involved in making decisions about green coffee buying need to decide on their short and long term strategy when it comes to buying. It is possible to buy cheaper right now, and make more money on roasted product. It is also possible to invest in the future too, and those companies with long standing relationships with producers look, to me anyway, to be in a stronger position than others.
- I don’t think we’ll see the wider industry embrace certifications again. It is pretty hard to feel positive about certifications like Fair Trade at the moment, when it becomes appears that the best they achieve is an alleviation of a symptom rather than any sort of solution to the root problem. There is still brutal fluctuation of price, and when the prices were high it was not unusual to see Fair Trade producers default on contracts because they could get more money for the coffee elsewhere. The idea that there was some of loyalty owed is somewhat laughable in the context of coffee’s trade history, but this is a topic for another post entirely.
It’s not all doom and gloom, though I’m aware that what is written above seems very negative. I still believe it is a great time to be in the business of high quality coffee. I think that with sufficient planning and anticipation, most problems can be avoided or turned into advantageous solutions. It will require that we perhaps do a better job on converting raw product quality into better customer experience, to charge what we need to charge to keep doing this for years – but I’ve also been saying this for years so make of that what you will.
I will be interested to look at the ICO’s production data at the end of the year to see if any of the above is accurate. I guess I really did a bad job on stopping with the predictions…
- We did also see various articles about new places, such as Yunnan in China, planting coffee. I’m not sure if significantly more coffee was planted though. If anyone knows of data collection of land under coffee then do please let me know! ↩︎
- Source ↩︎
- More info here and a summary by Michael Sheridan here ↩︎
- Summary here ↩︎
- This is obviously another term for “guessing” ↩︎
- For good reading on the science of predictions then I strongly recommend Nate Silver’s book The Signal and the Noise: The Art and Science of Prediction ↩︎