Coffee Market Update

C-Market trend over 45 years (Macrotrends)

Unprecedented is one of those adjectives that is overused and ill-used.

unprecedented

/ʌnˈprɛsɪdɛntɪd/

adjective

never done or known before

However, unprecedented is apt and correct to describe the current commodity coffee market. This really is the highest price of all time. A roaster friend did point out to me that the market touched US$3.50/lb in the 1970’s. Adjusted for inflation this is $19/lb. Imagine that.

I have often stated that the commodity coffee market is a poor price discovery tool for the product that millions of people make their day to day living from, whether growing coffee, exporting it, importing it, or roasting it. Wild speculative price gyrations, social media fueled misinformation, and countless armchair experts accumulate in a toxic mix of price instability for a product produced and consumed by millions every day.

The price of coffee seems never to be ‘’right’’ or ‘’fair’’ whether to the producer or consumer.

We are now in uncharted territory.  Roasters and café owners are already suffering from a cost explosion in non-coffee things, whether this be energy prices, staff costs, government-imposed taxation changes, rent, rates, and the other everyday things. Now add a 50-100% raw materials price increase that many are ill-prepared for, and we have the makings of a crisis. Interestingly some of the most furious price rise action has been at the lower end of the market, where the spot price for raw robusta beans has doubled. This is not a market sector that Mercanta has a lot of exposure to, but there are legions of roasters whose business is commodity arabica and robusta – what used to be a £2.50/kg ($1.40/lb) all day long buy for commodity robusta is now over £6/kg (US$3.40/lb). Whatever roaster pain is being felt in the specialty space, is potentially worse in the commodity coffee space.

The hardest part of the value chain is the roaster to wholesaler interaction. Wholesale clients would not necessarily be full on ‘’coffee people’’ and would have been buying roasted kilos of beans for x pounds, euros, Singapore dollars per kilo, or US$ per pound year in and year out, with some variation but generally nothing too dramatic. Some time soon, the wholesale client will call his provider for ‘’the usual order’’ and hear that the price is now 25-50% or more costly than the last order. This will be met with disbelief, a threat to shop around and call others, and general denial. We, as an importer/merchant, have been deluged with new enquiries from roasters seeking alternative supplies of raw beans because roasters are now seeing the new raw coffee prices appear on offer lists.

What to do, how to adapt?

One of my favourite statistics is a historical analysis of the commodity coffee market price. I have been in the coffee industry for 40 years. My analysis of the commodity coffee market going back even further than my 40 years is that EVERY peak of the commodity coffee market over US$2.50/lb was followed by a retracement (a price fall over 40% from the high point) within 12-24 months. This time it is different, this time that won’t happen, climate change, labour shortages, etc. etc. I am NOT saying that it will happen, I am just saying that for the past 40+ years, that did happen. It is a historical fact, not a guarantee (or even a prediction) that it will happen again. If history plays out, the market would be back to $2-$2.50 within a year or two.

For the time being, factors far outside the coffee world alone are driving the action. A huge backwardation (coffee is much more costly for immediate delivery than delivery in the future), likely technical issues to do with March ICE Coffee futures, since first notice day is 20^th Feb. Whoever has a short March position has next to no time to deliver physical coffee or roll out of their March short, or simply buy March futures, causing this spot month to go to a 13clb premium over May, and counting. It would appear to me that the commodity market coffee price has built in the worst-case scenario predictions for the current crop year. I do not believe these worst-case scenarios will unfold. But that does not matter, the market is what it is, and it is where it is. To buy physical coffee at origin, this highly inflated price is the benchmark. The question is for how long how high, and nobody really knows that. All I would say is that financial and speculative factors are a driving force, and these can be very powerful.

Also let’s touch upon the misunderstood term of counterparty risk. If you own coffee at $2.50/lb from xyz seller, this is only valid if you get such coffee. Remember the old saying. If you owe me £50 it is your problem, if you owe me £50,000 it is my problem.

Roasters, exporters, importers are not getting all the coffee that they bought. Defaults and non-delivery are a big deal. Mercanta’s model of decades of dealings with producers and exporters helps mitigate the fulfilment execution risk. It does not remove it. This will be about who deals with this issue better than the next. Some non-delivery / defaults can be catastrophic, particularly if someone sold futures hedging purchases. Then the coffee does not show up, someone is short futures and losing millions to get out of that predicament.

While I have focused on the roaster impact of the market, we should also touch upon the producer impact. I was in Colombia in January. The local price, cash in hand, paid at point of delivery, is over Col Peso 3m/carga (the local unit of parchment measurement). This is about double the ‘’normal’’ price. A producer from Central America told me he will get three crops in one, revenue from this one season what usually would be made in three. It would be fair to say the current price outlook will provide a windfall for the producer.

Form the roaster side, buy hand to mouth. Who would be encouraged or advised to lock in months upon months of cover at the highest price of all time? Buy in much shorter windows than you usually would. Be very alert to performance / fulfilment for coffees that you may have bought at ‘’yesterdays’ prices’’. Be flexible with your traditional Go To coffees. Alternatives may well fulfil the same role. Raise your wholesale prices, probably sooner rather than later. Nobody wants to be the first to move, your clients will all kick off and threaten to go elsewhere. Unless someone elsewhere is prepared to sell roasted beans for the green price, your annoyed customer will find the same answers elsewhere, just as Mercanta has no magic hidden storehouse of coffees £3/kg under everyone else. We DID have some historically priced beans at very competitive prices, and these we reserved and held for good long-standing clients, part of our customer service. But these coffees have mostly disappeared now along with every bean of past crop, overstocks, end-of lines, etc.

Our customers with coffees contracted and reserved at prices far below replacement will continue to receive their beans just like in the Good ‘Ol Days. But eventually these will run out, and regrettably when they do, the next price is likely to be much higher for the simple fact of the current market.

I would like to think our decades of experience (40 years in my case alone) will aid toward navigation through these rough seas. Mercanta is 29 years old in exactly one month. That will count for something in times like these.

Stephen Hurst, Mercanta Founder