A new era for the coffee business?

Commodity coffee prices at $2.50/lb are the highest in 13 years. This, in itself, is a newsworthy item. But, hidden within these numbers is an even greater story of a real shortage of fine specialty grade arabicas. At the same time commodity robusta remains overproduced, with a price 60% lower than commodity arabica (a ‘’spread’’ or arbitrage rarely seen before in the coffee market). Why don’t the industrial coffee giants gobble up this cheap and abundant supply of coffee at less than half the price of common Arabica?

In fact, I think we will see that start to happen as prices bite. Nevertheless, the fact remains that the world’s appetite is increasingly for differentiated, defined provenance, genuine specialty grade Arabica beans, while the production increases are all coming in the commodity robusta sector. Result – price differences from $1/lb for commodity robusta to $25/lb for the top Cup of Excellence lots.

Sorry guys, you’re probably all sick of me saying this, but the news is not that the commodity market is $2.50/lb but that the average price of fine coffee in small lots (Cup of Excellence) is now over $8/lb!! The problem is that specialty coffee has been (I am always tempted to write Has Bean here) simply too cheap. This is a mantra that the staff here at Coffeehunter HQ is truly tired of hearing. The issue now is not so much the outright price of coffee, but rather thespeed of change in the price of coffee. Some specialty estates that we have dealt with for years have prices that are higher by 50% or more this year compared to last. The full force of this change is yet to be seen in the market.

The role of the coffee merchant (Mercanta is a merchant; we are not brokers, importers or agents) will become increasingly better understood and more important. As well as crucial quality control, we also manage risk (amongst other things). This role has been undervalued in the past, as prices were relatively stable at origin. But now the greatest competition for fine coffee is a coyote (middleman, intermediary, local) at the farm gate with cash in hand, no questions asked, no quality control to speak of, and the highest price the farmer has likely seen for decades. This is the competition for fine coffee, as well as open market discovery (such as Cup of Excellence) where Asian markets will simply out bid Europe and North American buyers for the best coffees.

What is 2011 going to bring for the specialty coffee sector? Let’s peer into the crystal ball…

• Volatile prices – generally moving to the higher side. Frequent dramatic daily price swings.

• Increasing spreads (price differences) between the worst and the best coffee grades.

• Many industrial and some catering blends (driven by price parameters) will be made with inferior raw coffees.

• Frequent non fulfillment (default) of coffee shipments. Some shipment fulfilled with inferior beans.

• Lessening media interest in Fair Trade brand, which now competes daily in the same commodity market as everyone else for coffee beans. At the time of writing, hardly any genuine specialty coffee can be purchased at less than $3/lb while few production costs at farms genuinely exceed $1.50/lb. Fair enough?

• Booming domestic demand for coffee in Brazil – now said to be close to 20m bags. Difficult to count in a country that is also the world’s biggest producer but I think it is fair to say that Brazil is, or is about to become, the world’s biggest consumer as well.

• Increasing consumer discernment and awareness of better quality beans, well roasted by small and medium artisanal type roasters.

I am starting to see real change on the High Street with increasing numbers of independent top quality coffee places staffed by professionals. Despite a miserable economic picture, sales of top quality beans are buoyant, new enquiries arrive every day, new start-ups populate the horizon, and London School of Coffee is booked solid for virtually every imaginable course.

Specialty coffee’s time has come – long live the revolution!

SLH 2nd Feb 2011