“We have drawn a line in the sand which not many have dared to do. All our business is done on a fixed price, above the cost of production.”
For the everyday high street coffee trader, the matter of coffee pricings is a minefield… indeed, probably something to stay well away from. And yet, nobody in the business can fail to have noticed that something has gone quite crazy with regard to coffee prices – at a time when they were expected to be high, they have plummeted. The situation is very complex, and only professional coffee traders come anywhere close to understanding it.
Typically, certain countries are producing low quantities, and certain Central American countries have had their crops ravaged by the roya pest, at a time when worldwide consumption and demand are increasing. By the rules of supply and demand, this should mean high prices. But prices have gone downwards. According to the International Coffee Organisation, the monthly averages in November remained so low that at one point the commodity price dipped below a dollar a pound. The ICO wrote: “in real terms, the indicator is now below the level of January 2000, which marked the beginning of the period known as the ‘coffee crisis’.”
The UK has several very experienced traders in green coffee, and one of them is Stephen Hurst of Mercanta, the ‘coffee hunter’, who has the unusual talent of being bi-lingual and able to speak with coffee farmers in their own language. It is a cruel market, he told us – some farmers go bust, but for we consuming countries who pay big money for quality coffee, it is not a disastrous one. There are two coffee parts to the coffee market – ‘commodity’ coffee, which includes anything that might go into instant coffee or a giant brand’s blend, and ‘speciality’ coffee, which is the good stuff that artisan roasters bid for. It is in the commodity sector where the price drops have been felt. While the commodity market reports a dollar a pound for green coffee, the Cup of Excellence auctions, where the very best speciality coffees are bid for, gives another picture.
Recently, in Brazil, one coffee went at auction for $23.10 per pound, roughly double the price of the top coffee from the same area last year. In Colombia, several sold for over twenty dollars a pound; in Costa Rica, the top price was $30.10. In El Salvador, one coffee sold for $50.10 per pound, and in Guatemala the top crop sold at $45.10 per pound. The commodity price has an effect on the quality of big-brand coffee – it has always been known that when prices go up, the big brands may ‘adjust’ their blends, so they can use lower-priced coffee. “The commodity sector is where people ‘swap’,” agreed Hurst. “To commodity buyers, coffee is an utterly interchangeable product, and so far as they are concerned, a Peruvian is the same to them as a Mexican. If the Nicaraguan is too expensive, they’ll change to the Honduran.”
Does this adjustment make financial sense? The International Business Times reported last month that ‘Starbucks expects to save $100 million in fiscal year 2013 from declining commodity costs’. “I believe it,” remarked Hurst dryly. “An interesting phenomenon came in the run-up to the high price of $3 a few years ago. The arbitrage, which is the difference between the arabica price and the robusta, was the highest it had ever been (today it’s the least it has ever been). “It took the big brands so long to adjust their blends one way, that by the time they’d done it, the market had moved back the other way! It was almost hilarious…” However, he says, the speciality market is different. But there are still unfairnesses, and everything is not entirely better or fair in this sector. Nor, he alleges, are all claims of fair buying prices entirely true. It is time,he suggests, that more coffee marketers were open about what they really pay, relating their prices to the reality of farming, not the commodity indicators. “The market is a lottery, a casino. There is just too much smoke-and mirrors, too much mumbo-jumbo. I go up against many people who say they are paying a sustainable price, and they aren’t! “A lot of people have conveniently forgotten that ‘sustainability’ is not about where coffee comes from – it’s about what you pay for it. “It’s quite simple. It costs about $1.40 per pound to produce in the speciality market, and my company is the only one in the world which guarantees to pay twenty per cent more than the production cost.”
“We don’t work on the ‘price to be fixed’ kind of contract, but a lot of ‘speciality’ buyers do, irrespective of what they may tell you. “In this, the buyer may commit to buy a thousand bags for shipment next April, and the seller can fix the price… that is, between now and then, he can choose the day on which the coffee price is one he likes. It was the big banks who gave a free bet in this, and it turned out to be one of the most destructive things ever to happen in the coffee business “It sounds fine, except when the price never reaches the sustainable level. The guy on the farm waits for ever for it to do so, until he reaches the point where he has to throw the towel in. “We have drawn a line in the sand which not many have dared to do. All my business is done on a fixed price, above the cost of production.” This, adds Hurst, brings in the curious question of ethical certifications which speak of a guaranteed minimum price related to the worldwide commodity price. If the guaranteed minimum doesn’t meet the farmer’s cost of production, he is hardly any better off. How much of the world crop counts as ‘speciality’, and how much counts as ‘commodity’? When the world’s press runs scare stories, as in November, saying: ‘speciality coffee production in places like Costa Rica, a major producer, is declining slowly, falling 35 percent in the past decade’, should we worry?
Speciality coffee comes from careful farming, and to a degree, from the right geographic conditions. In Stephen Hurst’s view, the amount of well-grown speciality coffee in the world should not be a problem – there need be no shortage of it. “Speciality coffee is about three per cent of the total market, but it is more limited by the ability of the market to buy it, than by the farmer’s ability to grow it. Globally, we could find a great deal more speciality coffee, and there are a number of regions where growing it is quite possible. “There is a vast amount of potential for speciality coffee. It is not running out… it is the people who are willing to pay for it who are running out!” “If Costa Rica produced no more coffee, nobody would miss it… because there is no shortage. Other places are growing as much to make up, and more again. There is no shortage on a worldwide basis.
“Globally, I rarely see people abandoning coffee – some of the new generation will always sell the family farm, because they can get more by selling it for a golf course than for working coffee for twenty years, but it makes no difference, because some other places are not adding the odd hectare, they’re adding thousands. “Honduras has enough capacity to cater for the entire global growth in demand. Even Africa has made a twenty per cent yield improvement, although some of it is rubbish. Vietnam has also gone from nothing to thirty million bags.” Some origins have not gone down at all.
“Why is the price of Sumatran coffee counter-intuitive? Their prices are going the other way because they are distinctive – you can’t substitute them. You can swap a Honduras and a Guatemala, and thousands of bags do move from one side of a border to the other and are sold as a different origin… but Sumatrans, just like an Indian Monsooned, are completely irreplaceable. Their prices will live independently. “The doomsday scenarios are ridiculous. I see no evidence of any effect in the total scheme of things.”
An intriguing report reaches us from Colombia, where a senior member of the country’s coffee-producing sector raised the possibility of the country developing a business in growing robusta coffee – and was met with a reportedly ‘hostile’ response. The idea was to plant robusta, the rougher lower-grade crop used in instant coffee and as a bulking-out coffee in some espresso blends, in some areas of Colombia which are described as ‘largely desolate plains’, and where the crop could be machine-harvested, unlike the labour-intensive arabica crop of the hill country. He pointed out that robusta could be more profitable, and that certain cotntries already grow both coffees. However, the country’s coffee farmers protested that the idea would detract from the reputation of Colombia’s main coffee output, and heckled him repeatedly.
– Boughton’s Coffee House, December 2013