Hi Everyone,
I’ll be roasting this week on Thursday (the 16th), then delivering and shipping the next day.
We have some new coffees now, including a nice new Ethiopia Sidamo from the Oromia Cooperative (their leader was featured in the film “Black Gold” if you’ve seen it), a jammy Sumatra Gayo Linge and a floral and lemony Guatemala Hue Hue from the Rio Azul Coop. Coffees for this week are listed on the website (www.freeportcoffee.com).
Many of you have noticed that we are not in Kansas anymore with coffee prices - with much being reported in the last week about a spike last Thursday in the leading index price of an astonishing 44% over this June and over 60% since last year’s close. The result will be higher prices for coffee by the cup and by the bag - and serious crossed fingers across the industry that things don’t get worse when the harvest numbers start coming in for Central and South America this fall.
I wanted to shed some light on all of this for you, and tell you what this all means for customers of Freeport Coffee Roasting and those few of you who drink coffee from other roasters.
I wrote about a year ago about the relationship between coffee and global commodities markets, and the section that follows here is a slice of that article. I share this as a way of re-grounding you in the way coffee as a commodity can influence the rest of us.
To show you just how wrong predictions can be, I have left intact the section relaying a prediction that the “C” index price for this year would be $1.10 (this index closed at $1.98 last Thursday and it is at $1.95 today when I send this). After the excerpt, read on to see what this all means.
Excerpt from My October 9, 2009 Newsletter . . .
Most people reading this article are average Americans. We have mortgages or rent, healthcare costs, insurance bills, groceries to buy and the need to clothe and shelter our families. Hopefully, we all still have jobs, and in our jobs, we receive a salary or hourly wage that we expect to be consistent. And each month, we count on there being at the least some predictability in an amount of income, an amount of bills and ideally something left over at the end of all that.
The farmers we know locally have things hard enough, with the ways in which weather patterns (especially this year!), insects and shifting food preferences impact their financial equilibrium, and coffee farmers have all these same adventures. But unlike local farmers, who can sell their crops locally or regionally, the output of coffee farmers is almost always heading away from the countries in which it is grown and into the turbulence of global commodities markets.
Here's what I found when I looked up "Commodity" in Wikipedia:
A commodity is some good for which there is demand, but which is supplied without qualitative differentiation across a market. It is a product that is the same no matter who produces it, such as petroleum, notebook paper, or milk. In other words, copper is copper. The price of copper is universal, and fluctuates daily based on global supply and demand. Stereos, on the other hand, have many levels of quality. And, the better a stereo is [perceived to be], the more it will cost.
One of the characteristics of a commodity good is that its price is determined as a function of its market as a whole. Well-established physical commodities have actively traded spot and derivative markets. Generally, these are basic resources and agricultural products such as iron ore, crude oil, coal, ethanol, salt, sugar, coffee beans, soybeans, aluminum, copper, rice, wheat, gold, silver and platinum.
Commoditization occurs as a goods or services market loses differentiation across its supply base, often by the diffusion of the intellectual capital necessary to acquire or produce it efficiently. As such, goods that formerly carried premium margins for market participants have become commodities, such as generic pharmaceuticals and silicon chips.
Yuck. Do we all consider coffee to be "the same no matter who produces it"? Of course we don't, but on a very important level, the market does - and this is the awful, awful paradox of coffee. A few weeks from now, after the polite grounding, I am going to indulge in a mega rant about the way I think this should be - but not yet.
The "C" Market:
As with the other globally-traded commodities mentioned above, benchmark coffee prices are set by large trading exchanges, here with one for Arabica coffee (most specialty coffee) based in New York, and the other for Robusta coffee, based in London.
The current "C" futures rate is set based on the forecasts of future forces that shape the supply and demand of coffee - to include weather, crop cycles, demand trends, crop yields and business conditions. And this rate is then used as an index against which coffee transactions at every step of the market, from grower to roaster, are priced. Transactions are based on differentials - either a premium or a discount - relative to the "C" price.
In my short time as a commercial roaster, I have seen the C price reach a high in mid-2008 of $1.65, then drop to its current rate of $1.35 (a 20% decline). I read today that the rate for the start of 2010 is predicted to be $1.10 (a 33% drop), based on the bumper crop coming out of Brazil this growing season.
The Big Players:
The output of the world's three largest producers, Brazil, Vietnam and Columbia, has a significant impact on the C price, as they collectively produce nearly 60% of the world's coffee. The forces of nature, such as this year's record rains in Columbia, can drive shifts in the C rate, as can diseases, pests or frosts. Government actions, like Vietnam's surge in Robusta production over the last 20 years, moves the C rate, and can work to the benefit of farmers (when cropland is converted to coffee production) or to traders (as they selectively hold and release coffee to the markets).
The Farmer:
So now back to our farmer. The reason all this matters at the level of an individual grower is that, with very few exceptions, the rates received by growers are also indexed to the C price. And unfortunately, the C price doesn't care about the costs of production in individual countries or regions. It doesn't care about wages, fertilizer, equipment maintenance, the cost of getting to market or the risks of local weather patterns. And when the markets dip, as they have now, farmers with relatively fixed production costs can suddenly find their revenue falling below their cost of growing coffee.
The strategies farmers use to respond to these crises include crop substitutions (growing more profitable crops on the same land), cutting production costs, increasing yields, increasing coffee quality (which can improve the grading of their coffee and increase the price) and conversions to organic growing methods or other growing schemes.
But these strategies take time. They incur costs that may not be possible for farmers of limited means. They carry risks. And they are simply not attainable for everyone. In Costa Rica this spring, we met some entrepreneurial farmers who had invested in micromills for their farms - a strategy that allows much greater control over coffee quality and the elimination of the costs or lower prices resulting from processing coffee at a large, centralized mill. But I remember asking our host about the kind of farmer who can make a micromill work, and he explained that these are people with a unique combination of farmer skills, business savy, daring and mechanical aptitude. And not every farmer is suited for such an investment.
My Concern
I feel like coffee is at a crossroads right now. In the past ten years, a "third wave" of coffee culture has developed in the U.S., Europe and Japan, with amazing improvements in coffee sourcing, roasting techniques, brewing and consumer appreciation of new and different coffees. And with a healthy economy (and a strong coffee market), the incentives were plentiful for coffee growers to push the envelope. Old, lower yielding strains of coffee were replanted. Micromills were installed, allowing special coffees from single plots of land to be isolated, tested and improved to the point of magic. Innovative sorting methods allowed improvements in the processing of coffee, resulting in cleaner, fresher tastes. Environmentally sensitive growing methods improved water quality, reduced water usage and allowed coffees to be grown with fewer chemical inputs.
But every one of these improvements requires the assumption of risk and investment. And if, at the end of the day, the price to be gotten for a pound of green coffee isn't high enough, these investments won't be made, and the great juggernaut of quality will slow or even stop. When our own economy goes south, people here look for ways to save, and the price they are willing to pay for a pound or a cup of coffee goes down. And the traders in New York and London see this trend and lower the C rate. And this then trickles all the way back to the mountains of Guatemala and Sumatra and Ethiopia and the others.
End of Excerpt
What just happened to change things?
Quite a lot of this increase is based on simple supply and demand. The output of Brazil in Columbia is down this year (based on weather and replanting cycles, among other factors), and stockpiles of coffee maintained by large players for their use in playing the market are also down. With less coffee on the market, prices rise. Then, add into the mix the commodity traders who see a ripe set of circumstances for increasing futures prices, and away we go.
And on the horizon, long range weather forecasts for Central and South America suggest a wetter than usual year, and the big coffee countries (who love money as much as the next guy) are threatening to hoard supplies to play the market of climbing costs.
What does this mean for the rest of us?
Its interesting that a year ago, I was talking about what happens when coffee prices go too low, but now here I am on the flip side. What happens everywhere when they go too high?
To put this all in context, I’ll start with the illustration of a family and its groceries.
Consider a household with $100 a week to spend on groceries. Fuel prices go up. Grain shortages cause all things made with corn to go up. Some early winter weather kills some crops and vegetable prices go up. And overall, economists hypothesize that “food prices have risen 15%.” So does our family struggle to come up with an extra $15 a week? I learned a few years ago that in large part, the answer to this question is no. They keep spending their $100, and they shift their buying decisions away from the patterns of before to new choices that cost less (often opting for bulk over nutrition).
So here in the world of gourmet coffee, what we all worry about as roasters and providers of coffee is that as the price of great coffee goes higher, coffee drinkers will shift their allegiances from, for example, a Starbucks latte to McDonalds, or from a pound of Peets Major Dickensons to a can of Chock Full O’ Nuts).
So roasters try, try, try to stave off price increases. Large roasters hedge their bets by themselves playing the commodity markets to lock in future purchases at favorable prices. They dispatch traders to foreign lands to hopscotch over importer and middleman markups. Roasters of all sizes shop around for the best deals.
So you will likely see coffee prices rise, though my understanding is that most chains are planning only for increases of 10%. Large roasters will also make up the difference by using lower grade coffees in their blends (which, in contrast to coffees from single countries or sources, make up the majority of their business).
In our case, I have just raised the price of our coffee from $12.50/pound to $12.99, an increase of under 5%, and because I feel very strongly that I don’t want to pierce the $13 per pound ceiling, that is as far as I am going for now. My own coffee costs have gone up an average of 20% as a result of some advance buying I did, but I know better than to pass this along (and have you all switch to Chock Full O’ Nuts). So, just please buy more coffee from us (thanks).
This circumstance is likely to have a detrimental impact on small roaster-retailers - with their costs of goods going crazy and a finite limit on how much they can charge for their products. If you are out there in the heartland and your local shop tells you they need to bump their prices, please know that the NEED to bump their prices. I hope you will continue to support them.
What does this mean for coffee growers? Going back to my explanation above of how commodity markets impact what farmers receive for their coffee, you can see that a market shift like this can be a very good thing, resulting in a rare boom time for many growers. But increased prices also mean more selective buyers, and the big roasters that drive much of coffee demand will be working hard to stabilize their costs, and that can mean large shifts in purchases from one country to another in search of cheaper blending coffees.
Where do we go from here? Part of the answer lies with nature, and the output from the next crop cycles of the major producing countries (Brazil, Vietnam and Columbia). There is a true supply and demand component to coffee prices and the size of the fall harvest in Columbia and Central America will itself exert an impact on the index prices.
Yikes! What should we do now, Batman?
I don’t think you should change anything now, since great coffee is still an affordable indulgence, even if the price goes up by 10%. But I did want to share this update with you so when you see price and product changes as you go through your day, you will know what is happening.
One thing you will certainly see is more blended coffee at retail. Have a look at the coffee aisle the next time you go to the grocery store, and most of what you see there will be blends, with a few bags from Columbia, Sumatra and Costa Rica. Blends are the great equalizer for large roasters, since no one but them know what is inside, and driving down the cost of “filler” coffees helps to smooth market fluctuations.
So if you want good coffee, buy local. Know your roaster and when your coffee was roasted. Store and brew your coffee with the respect it deserves, and if your local roaster or your local cafe needs to raise their prices a bit to keep offering you the best, support them (and the farmers).
Enough for now - stay tuned for updates as they occur.
Enjoy the weekend!
Kent
