The commodity price of Arabica coffee hit its highest level since 1998 at the end of last week. Although our business operates largely independently of the commodity market, it is impossible not to feel the effects of such a major development.
On Monday (2 August) Arabica coffee for September delivery reached a high of US$1.815 a pound on the ICE US futures in New York. It has since fallen back slightly, closing at US$1.6985/lb on 5 August. To put this into perspective, the Fair Trade minimum price is US$1.35/lb, a typical price for specialty coffee beans is US$2.00-$4.00/lb, and the commodity price had recently been hovering around US$1.25-$1.40.
At Mercanta we have gone a long way towards ‘de-commoditising’ our product, by establishing direct, independent relationships with premium quality coffee growers. The specialty coffee market is notpegged to the commodity price and, usually, we remain largely immune to the daily price fluctuations in New York.
However, we cannot help but be affected by major commodity market trends. The majority of coffee farmers, including specialty coffee farmers, reference the market price when negotiating sales. The bottom line is that, when the market is up significantly, this inevitably pushes up the specialty price.
Put simply, when Mercanta negotiates prices with growers the following factors come into play:
• What price is available to the grower in the local market for partly processed coffee parchment or cherry? (This rate generally fluctuates in line with the commodity price).
• What price are other buyers paying for specialty beans, thus benchmarking a level for that farm?
• What is the production cost for the farm? Typically this ranges from US$1.00-$1.40/lb, so the so called ethics of buying rarely come into play in the true specialty business. Invariably Mercanta is paying 30-150% MORE than the cost of production.
• What is the grower’s quantity expectation? Mercanta can pay any price for coffee – but if the grower seeks a substantial premium for his product, there may well be a quantity impact on what we can buy.
The recent developments in the commodity market emphasise a point that we have been getting at for several years now – specialty coffee as sold by Mercanta is undervalued as a product. All the more so when you consider that the average price for a Cup of Excellence coffee in 2009 was US$6.69/lb and so far in 2010 is US$7.75/lb, with winning lots reaching as much as US$35/lb. The Cup of Excellence brand offers fine coffee in small lots, judged by expert cuppers – this is exactly what Mercanta sells. Yet our (non COE) coffee typically commands only US$2.00-$4.00/lb – ie. it sells for prices that are far closer to the market rate for commodity grade coffee, even though an increasing number of the farms that Mercanta offers have a Cup of Excellence pedigree.
This point is well-illustrated in the below graph, showing the evolution of coffee prices following the collapse in 1989 of the International Coffee Agreement, which had regulated prices and exports. The graph shows: the International Coffee Organisation’s annual average commodity price for coffee; the ICO annual average commodity price for washed Arabicas (non Colombian); the Fair Trade minimum price; and the Cup of Excellence annual average price since the first auction in 1999. The dashed rectangle shows the typical price range of non-COE specialty coffees – ie. what Mercanta sells.
This data makes two things clear:
1) Specialty coffee demands a far ‘fairer’ price than Fair Trade (which will either pay farmers the minimum guarantee of US$1.35/lb, or the market price plus US$0.10/lb premium).
2) The gap between COE lots and ‘normal’ specialty coffee is growing ever wider.