Although Mercanta is not in the commodity business, we, and everyone involved in the green unroasted coffee business, are in some way affected by/connected to the ”commodity price” as quoted on the New York and London exchanges. The commodity price for coffee is a topic of endless debate, frequently misunderstood, and dare I say it, generally not beneficial at all for the specialty coffee business. The commodity market is a buyer of last resort, a home for unwanted (overproduced) coffee that meets a minimum quality standard.
On the plane over to Colombia recently, I watched a film called Margin Call. I was a commodity trader myself back in the day (although at the time my customers were roasting companies like Kraft and Nestle and we did have a cupping lab on the trading floor) so this film had a resonance – even though it was about the 2008 financial market collapse rather than anything at all to do with coffee or other commodities. In the film, investment banks, pension funds, hedge funds, and wealthy private investors created a class of bundled (mixed together) mortgage securities that were so complex that few, even those who traded them, knew what the real underlying value was. However, every minute of every trading day was spent buying and selling these financial instruments until one day the music stopped and (in the film, though also I imagine in reality) one large market maker simply sold everything in a single day; precipitating the market crash. The ”real” value of this paper was a fraction of what is was trading for.
Then, on CNN I saw another disturbing report, stating that some 70% of daily trading on stock markets is carried out by High Frequency Traders, companies who own super computers, operating at the speed of light, to detect fractional anomalies in stock prices. These companies, who are huge, never ”invest” in a stock for more than a single trading day; they simply buy and sell huge volumes of stocks from one minute to the next; all done by computer.
My point is that the price of coffee (the commodity) currently bears little reality to what is happening in the real world. Structured investment instruments, hedge funds, high frequency traders all affect the ”price of coffee” – which is backed by real inventories of dubious quality in commodity exchange approved warehouses in major ports across the world.
I listened to these high frequency traders whose ”investment” in a company is measured in minutes or even seconds. I saw a film which was a good dramatic illustration of what happened to precipitate the financial crisis of 2008. I did not like what I saw. These industries do not add value, they do not invest over time, they do not deal in the tangible.
The specialty coffee business is about real people. Real people on farms, in mills, in warehouses, in cafes, in restaurants – real people who move real products from A to B, distribute them to the four corners of the world. Real product in a cup, the fruit of real effort somewhere at the end of a remote track in Guatemala or Rwanda or Sumatra.
All of the following are prices for ”coffee”…
£1.29/kg (US$91clb) is today’s price (8 March 2012) of one kilo of robusta commodity coffee.
£2.35/kg (165clb) would be a decent estimate of the typical cost to produce a kilo of arabica beans, although this varies according to origin and the cost of inputs.
£2.64/kg (186clb) is today’s price for one kilo of arabica commodity coffee.
£4.08/kg (287clb) was the price of arabica commodity coffee a year ago, on 8 March 2011.
£4.32/kg (304clb) was the price of one kilo of Arabica coffee on 3 May 2011, when the commodity market hit a three decade high.
£4.25/kg to £7.10/kg (300clb to 500clb) is the in store price of a typical kilo of specialty coffee excluding very fine, exclusive, limited edition and many African coffees.
£10/kg (650clb) is around the average price of Cup of Excellence award winning beans.
£10-£18/kg ($7.03 to $12.65/lb) would be a decent range for roasted espresso beans in the wholesale catering market, although this would vary considerably by country and quality – it certainly applies in the UK.
£2 is decent estimate for the price of one cup of filter coffee in a London coffee shop.
So what is my point?
Well firstly, I can make a solid case that ”’the price of coffee” has a lot to do with a hedge fund’s or a high speed trader’s imagination. One day on the trading desk back in the 80s (yes, hard to believe, but I am that old) eight traders on the coffee and cocoa desk sat round thinking how clever we were to be amongst the five biggest coffee trading companies in the world – global sales of over 5 million bags (yes, 5 million). A fellow wandered over from somewhere else on this huge trading floor. He asked ”What do you coffee guys think of the price of coffee??”. We said we had a 100 lot (100 container or 27,500 bags) long position on the market. ”Good, said the stranger from the other side of the room. I have a 500 lot long position”. That guy worked for the bank’s proprietary trading desk (who trade everything simply based on the screen prices and mathematical equations) – and his position was five times the size of ours, considering we were one of the top five coffee trading companies in the world and he would be trading FCOJ (orange juice) or pork bellies the next afternoon. And that was 25 years ago, imagine now.
It is, however, worth noting that despite all this, coffee is actually in a reasonably good place now, where many producers, importers, roasters, consumers can get good ”fair” prices, and actually pay very little for a premium differentiated product. The ICO reports global production at about 131 million bags and consumption at 136 million bags, though there is a decent margin for error on either side, supply and demand are roughly in balance, I would say.
My second point is that the coffee industry spends too much of its time saving pennies at the bottom of the value chain, where specialty coffee is relatively inexpensive – even when the commodity index was at a three decade high. Instead we should be adding value at the top of the chain, with fine coffees for discerning customers. In other words, customers who are willing to pay a small premium for a quality product – because they understand that this product is superior. Everyone in the value chain will then benefit – from grower to drinker.
My summary.. Every conversation, every minute spent on trying to save a penny at the bottom of the value chain, to save fractions on the cost of relatively inexpensive raw materials, would be better spent in consumer and customer education. The wine (and now whisky and micro brewed beer) industries have done this. An educated and informed consumer will make a better choice – quality participants in the value chain will all prosper. And the commodity market’s fluctuations will have less and less relevance to this chain.
Stop ten people in the street, ask them to name 3 wine grapes. Eight or nine could do it. Now, do the same for Arabica coffee varietals. The answer would be zero or one person. That is where efforts should be spent. There will be real payback from these consumer educational efforts.
Even in difficult economic times, specialty coffee has held up (better in some markets than others). Even 16 years after I started Mercanta, we have yet to see the real final evolution of specialty coffee. That will be the day when the coffee varietals question gets answered in the street!!!
SLH 8 March 2012