International Coffee Day feels very different this year. Introduced by the International Coffee Organization (ICO) on October 1, 2015 to raise awareness of the product and challenges faced by producers, the day has generally focused on how the low prices paid for unroasted beans barely covers the costs of farmers, and a lot less to support their families.
However, not this year. In the last 12 months, the C price, the reference price for basic grade Arabica coffee on the New York International Commodity Exchange, has risen from $ 1.07 (£ 0.80) per pound (454g) to around $ 1.95. In July touched $ 2.08.
Arabica bean prices ($ / lb)
Almost all coffee delivery contracts are compared to price C, with the result that prices for green Arabica (unroasted beans) increased by more than 80% over the past year. Those of Robusta coffee, a cheaper and less palatable alternative, have rose more than 30%. And there is the possibility that these prices will go up more in the coming months. We may be on the verge of a major price correction that will move the market higher for years to come.
Why did coffee become expensive?
The main reason for the price hike is a series of environmental events in Brazil. Brazil is by far the world’s leading coffee producer about 35% of the world harvest. The production volume fluctuates regularly between the “active” and “inactive” years, and this is usually not enough to greatly affect prices because producers mitigate their risks through inventory management and price hedging using the coffee futures market.
However, returns in 2021 are likely to be dramatically lower. This is due to A combination from a severe drought earlier in the season, which reduced the number of coffee cherries, and recent severe frosts that could further damage fruit and even trees. Brazilian authorities they are projecting the lowest Arabica crop in 12 years.
The big question is how this will affect future production. Coffee trees can take up to five years to mature, so it will take a few seasons before the extent of the damage becomes clear. Like some respected reporters are suggesting, frost causes maximum damage, potentially hitting two thirds trees: there may be a lasting drop in global supplies. This could push prices above the $ 3.00 and even $ 4.00 barrier.
The long cycle of coffee
The history coffee has been characterized by extreme price volatility. Periods of oversupply have progressively lowered prices until a catastrophic event, be it environmental or political, results in a correction.
During the 1930s, a combination of bumper crops and weak consumer demand in the depression era led to a massive oversupply. To reduce excess stocks, Brazil resorted to dumping coffee into the sea and also turning it into fuel for locomotives. At the other extreme, many coffee trees died in 1975 when Brazil suffered a series of “black” frosts. This led to a 60% drop in production in the following harvest as prices tripled between 1975 and 1977.
In 1962, the ICO introduced production quotas to try to keep prices up in the face of those ups and downs. This was supported by the United States to prevent communism from spreading from Cuba to mainland Latin America, but was abandoned at American insistence after 1989. This led to an oversupply and, ultimately, a late coffee crisis. century in which the C price stayed below $ 1.00 for four consecutive years. It had tended to trade between about $ 1.00 and $ 2.00 per pound, and the price drop saw many producers going hungry.
The price only recovered when a coffee leaf rust infected a significant portion of Central American and Colombian production. The bitter irony of the coffee market is that prices for producers only improve when many of them suffer unsustainable losses.
The Robusta problem
Coffee prices fell in the latter part of the 2010s mainly as a result of the expansion of world production. Most notable it was vietnam, which is now the world’s second largest coffee producer and accounts for around 18% of total world production. Up to 95% of Vietnamese production is Robusta.
Sturdy was actually It was first used for coffee cultivation due to an environmental catastrophe, when East Asian coffee production was virtually wiped out by coffee rust in the late 19th century. In more recent times, Robusta “cleaning” procedures to reduce off-flavors have been improved to the point that roasters more and more resort to increasing its proportion within a mixture. This is particularly done when targeting markets that are primarily price driven, such as instant coffee.
If prices continue to rise now, using more Robusta in blends could prevent coffee from becoming too expensive for consumers. But this will be difficult to do, at least in the short term, due to severe COVID restrictions in Vietnam. This has caused considerable interruptions both to transport coffee from the central highlands to the Ho Chi Minh City export hub, and to then manage the logistics of subsequent shipping. The same problems have arisen in many coffee-producing nations.
Consequently we have brokers struggling to secure sufficient stocks, roasters contemplating how to pass on price increases to their commercial customers, and consumers facing the prospect of paying higher prices for domestic coffee products.
But will the producers be the winners of this latest price increase? Brazilian agribusinesses that survive the immediate impact of frost will surely do so, as will well-capitalized, medium-sized farms in Latin America.
However, what about the small farmers and subsistence farmers who make up 95% of coffee producers? For years, the ICO and its member states have portrayed these farmers as victims of global market forces; now we will discover if these actors are capable of returning to farmers the greater value that their coffee generates. If so, International Coffee Day will be something to celebrate.