Hi Friends,
This weekend, I will be roasting on Sunday, October 4, then shipping and delivering on Monday.
We have some amazing new coffees this week, a fair trade/organic Ethiopian Sidamo from the Sidama Coffee Farmers Cooperative Union (SCFCU) and a sweet, rich FTO (fair trade organic) Sumatra Mandheling.
And, for espresso fans, we herald the return of Giddy Goats. We had to put the Goats out to pasture for a few weeks, until we got some more of the coffees that make up this top secret blend, but its time to get Giddy again!
With this article, I begin a series on social issues in coffee. In the coming weeks, I'll take you one by one through the major forms of certification (fair trade, organic, shade grown and bird friendly), and share some thoughts about how current economic and cultural forces in the US are impacting our quest for great coffees. Drop me a line if you have questions on any of these areas.
As a background for these articles to come, I'd like to give you a grounding in the macro level coffee market, and explain the forces that shape coffee supply and demand around the world. Taken together, it is these forces that determine the prices received by the vast majority of coffee farmers - and as you will see, these people have embarked on a wild and unpredictable ride.
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.
Enough for now - stay tuned for more.
Enjoy the weekend!
Kent
