You may have read or heard in the press about coffee prices. There’s a lot of noise at the moment as markets are on fire and prices are at a 13 and a half year high in the commodity market.
I write this while on an aeroplane on my way to El Salvador to meet buyers of old and to meet some buyers of the future, so this is a very interesting time for me with the markets at unprecedented highs.
So before I dive into my dilemmas I’ll try and give you an idea of what the C price is, and its relationship to what is paid for coffee in the commercial markets, in the fair trade / certified coffee markets and in the specialty / direct trade markets.
So what is the C price ? The C price is the price paid for traded commodity coffees at the New York financial exchange. This is a two-fold market of current prices and also a futures market for purchase of contracts for coffee for a later date.
The prices are dictated by a few things, but in a stable market these main things are weather conditions at origin which will have an effect on yield for that year. There is a saying if Brazil sneezes the rest of the world catches a cold, and this stems from this kind of thing. Markets are heavily influenced by statements from coffee-producing countries’ organisations, regarding dropping yields or a lack of supply of coffee in the market. Like anything supply and demand are very important factors.
In recent years demand has been outstripping production, but huge stocks have been balancing that deficit. Now they are kind of depleted, forcing this price rise. China and Brazil are two big forces in growing this demand, with a new culture of enjoying coffee emerging.
There is also a country differential. This is an amount that the country’s coffee will fetch. For instance Brazil and Peru, Ecuador coffees will fetch lower than the c price than a Colombian, El Salvador or Costa Rica which will fetch more.
So a scenario today: the market is at $2.54 (which at time of writing it is). I want to buy a contract for coffee today then I will pay $2.54. But should I want to protect myself against what I think is a rising market I can buy coffee for a premium to the market, for this case we will say 7 cents. That will cover the costs of insurance and keeping it in the warehouse so paying $2.61.
If the market drops I get left with a coffee contract costing $2.61, but have protected myself against swings so can offer a stable price to customers. But should the market rise, I can either use that contract still or sell it and make a profit.
So what happens is that bankers and financial institutions can use this as a way of speculating what the markets will do. Normally commodities are not the chosen playground of these kinds of organisations, but in these volatile times of share markets and currencies it seems to have become more popular and one of the reasons for the new high price.
Added to this new speculation is a shortage of supply, and there have been some weather alerts, increased demand, and with things like leaf rust: the market is on fire with volatility everywhere.
The certified coffee carries a premium on top of the commodity price, so organic tends to be between 5 – 10 cents but can be as much as the buyer wants. That’s what the C price is – it’s the base level for anything always more can be paid (but rarely is).
Fair trade has a base price of $1.31. This is the lowest price that can be paid, but more can be paid. At times like this the market price is the norm, with small differentials against the market to reward the certification, but it becomes less attractive for a producer in these times of high market, and many contracts are not honoured.
OK enough markets.
So how will all these complicated numbers effect my trip to El Salvador and Costa Rica? Well this is the interesting part. A very rough in the dark cost of production of coffee ranges somewhere between $1.00 and $1.30 a lb depending on where it is and variable costs of living / special circumstances. So everything thereafter is for the benefit of the producer and quite rightly so. The producer can then invest this in doing extra with the harvest, so selective picking, better separation, more time with processing, and this is a sliding scale of costs depending on what the producer wants / is able. Good coffee needs effort, and attention and that costs.
So the prices we have paid in the past would have started at around the $2.80 a lb mark (a tiny 35 cent premium at the moment they could get with no work at all compared to what used to be a 100% increase on commodity coffees) up to much more in some special cases, as high as $5 – $6 a lbs.
But has the cost of production gone up ? Have other costs gone up? Have we ever looked at dropping costs when the market has dropped? You see if prices are to go up then it has to become a two way street and low markets see drops, and I don’t really want to pay less for my coffee at anytime.
But of course effort has to be rewarded, but I’m thinking does the premium have to be as high when the market is adding in some of that reward?
All rhetorical questions I guess, as when it comes to buying coffee it comes down to tasting and theprice the farmer wants, and then I decide. If I want a coffee I’ll make sure I secure it, regardless of price. But high prices mean we can take one bag two bags where as a more competitive price means we can take lots of it .
Talking to one producer since being here in El Salvador, the prices we have agreed for this year are virtually the same as they were last year, when the market was at around $1.40 a lb. What we are paying is still way up and above the high point the C Price is at today ($2.54) and way above the average for any El Salvador coffee.
Where I do see issues for is is with new partners, and where the negotiations begin for new coffees we’re looking to secure. Also with importers and when not-direct trades are done, I fully expect increases here, because of increased costs in financing and shipping and generally being in business costs more money this year than it did last.
Leading on from this I think something that is a far more real issue regarding the price you pay for coffee, is increases in raw materials such as gas for roasting (a 30% increase for us this year in cost of bottled gas), packaging, shipping and the increases in VAT, and cost of living increases, putting pressure on employees of all our suppliers and our staff, which means increased cost of employment, which will all end up being passed down the chain.
But amongst all this, coffee is the best value treat food item out there. Where else can you enjoy something that is so special, prestigious and unique for so little cost. To do the same in any specialty food will cost you many times the cost of a great cup of coffee.
The people these price rises will affect are the commodity coffee buyers, whose cost of product will get much closer to specialty. So the choice of if you want good coffee or rubbish coffee will be easier. But then that will give us all a whole new pricing problem so let’s not go in to that one just yet.
For now I am enjoying the market being high, and I think we should all revel in the fact that producers are finally getting what their coffee is worth. For too long they have not.