The Ongoing Commodity Coffee Price Crisis and the Mercanta Price Guarantee

Stephen Hurst discusses the current plummet in the C-Price and how specialty coffee should address volatility

It is the early 1990’s.

The International Coffee Agreement, a producer/consumer cartel of sorts, which for many years had regulated the commodity coffee price via an export/import quota system, had ceased to exist. Not only did this mean that the price bands of US$1.20 to US$1.40/lb would no longer be ”protected” by the export/import quota system, it also meant all the unsold coffee warehoused at origin (a key tool for maintaining prices) poured out into the world. The commodity market duly collapsed.

I recall the commodity market price for coffee going below 50 cents per lb ($0.50/lb) in the 1990’s.

And here we are in 2019, more than 25 years later. The commodity coffee price is below $1/lb. But if we were to adjust today’s price for 25 years of inflation, then I will make the argument that the commodity coffee price is the lowest it has ever been in real terms.

All the while, coffee as a beverage has never been more popular: cafes are everywhere, and coffee is THE hot ”thing,” whether delivered in the artisan café on the corner, a cafetiere at home, or via a Nespresso capsule machine. Coffee is topical and popular. Everyone has an opinion about coffee. Nearly everyone in coffee producing countries seems to (or really does) know someone who grows coffees. The depth and breadth of consumption has never been so wide and deep.

So why is the price of coffee the worst it has been in at least 40 years? Surely this does not make any sense.

And yet it does.

Coffee is a ”supply driven” product at the commodity level (you will note during the course of this article I will constantly refer to commodity coffee: the generic, industrial, financial instrument – a tradeable commodity. This commodity product is so entirely different from what many perceive as specialty coffee, though it is the same product in a different guise, that we must distinguish between the two.

Commodity coffee is overproduced, as simple as that. There is more (sometimes far more) produced than is consumed. Coffee has few other uses, unlike cocoa, other than as a beverage. The commodity coffee market, the New York C contract, is simply a buyer of last resort. When a product, any product, is overproduced, there are few options. Option one is to store and retain it. This, of course, costs money and the product will degrade. Option two is to meet the minimum New York C commodity contract criteria and sell your coffee to the exchange, the buyer of last resort. Coffee delivered on a New York C contract must meet a certain minimum quality and cup standard that will be far lower than the quality that specialty coffee afficionados will be familiar with. With this approval from the exchange, you can deliver your coffee and receive whatever price the exchange is quoting, give or take some adjustments.

If the stock of coffee tenderable on the New York C is rising, that means some vendors are using the buyer of last resort option and delivering coffee on the exchange. If the number of certified stocks is falling, roasters are taking delivery of these tenderable inventories. 85% of the certified stock for the New York C commodity exchange comes from Mexico, Honduras, and Peru. Basic commodity coffee, in excess of world consumption requirements, delivered to the faceless exchange.

The ”price of coffee” in a way is based upon these stocks of coffee lying in various tenderable ports around the world. Rather like a currency that is backed by gold somewhere in a reserve bank, these certified inventories of baseline ageing raw coffee beans is the so-called ‘price of coffee’.

And a curse upon the specialty coffee business it is. However, be careful to lament the very existence of the commodity market, as I have frequently done. Without the commodity market, it could be argued that the price of unneeded, overproduced coffee without a home would be zero.

So here we are, in 2019, in the midst of a global boom in specialty roasters, cafes, chains, Nespresso and Keurig capsule machines, barista contests, and interest from the four corners of the world for quality coffee beans. In the midst of all this, the price of the very product everyone is talking about is the LOWEST it has been for decades.

This irony, this dichotomy, can be explained in many ways, and some of the explanations will not prove a popular read. Let’s not forget hysterical headlines about ‘The Threat to your Morning Cup of Coffee’ and ‘No More Coffee for You in a Few Years Time’. Really?? Just now there are probably 5-10 MILLION more bags being produced than are being consumed, and barring a climate disaster (frost or drought) that has a severe impact in Brazil, it is likely to stay this way for a while.

Low-cost producing countries (Vietnam, Brazil, Honduras, Peru, perhaps later Uganda, Laos, and China) and those countries seeking to win a production war (Colombia) with neighbours better equipped to fight it have added far more production year-on-year than they have succeeded in growing internal consumption. Global consumption tends to grow in a mild gentle upward trajectory over time, while production tends to vary considerably. High coffee prices at any time attract additional production which comes into effect 2-3 years later: the much cited the boom / bust cycle of coffee. This is why production of coffee outstrips demand, sometimes considerably so, in recent times.

Into the fray comes the specialty coffee movement, Fair Trade, Rainforest Alliance and many other ”movements” that attach themselves to coffee because it is so widespread and well-known.

But specialty coffee is NOT a numbers game. Mercanta is a significant player in global specialty coffee terms, but one medium size coffee farm (in Brazil) can produce more coffee than we trade in a year. And here comes my favourite one (yawns from all the Mercanta staff who are sick of hearing this one)! I watched an interesting UK TV show last year: ‘Inside the Factory’. In one episode, the programme visited a Nestlé instant coffee factory in Derbyshire in the UK. Nobody talks about this factory, nobody blogs about it, posts Instagram photos, Twitter feeds, and I doubt few follow this plant on social media. Yet, this factory takes in 100 metric tonnes of coffee a day. A DAY! This commodity raw coffee goes into making Nestle soluble coffee products. Meanwhile, in Instagram World, abuzz with the latest coffees, methods of preparation, resplendent with awards, queues at the counter (this Must Visit Café, the one that everyone loves) uses 3 metric tonnes of coffee a year. A YEAR!

Takeway? 35 of the busiest cafes you see in every High Street and shopping mall use in a YEAR what this Nestle plant uses in a DAY. In short, specialty coffee does not use much coffee, and my mantra to customers is that there will not be any real or future shortage of the beans that specialists and aficionados want in future, as long as remunerative (or sustainable – more on this later) prices are paid to the producers of such beans.

Fair Trade. Must be good, paying ‘fair’ prices to coffee producers with limited market access who are at the mercy of global pricing forces far from their control. I will not malign the beneficial social and humanitarian aims and realities of a scheme like this. However, when you connect remuneration to the simple fact that such-and-such communities are coffee producers, then a market distortion is created. In so doing, for whatever well-intentioned purpose, the production of marginal and borderline coffees is perpetuated, producers continue to get by on a sort of life support, the global over production curse is exacerbated, and more hands are wrung at the low prices. I regret that the unfortunate truth is that global price support schemes not linked to coffee quality are a contributing factor to the extremely low, below-cost-of-production prices that we are seeing today. As evidence, I point to nothing more than the subject of this article and the current truth of the coffee price.

Mercanta has long sought to de-commoditise the coffee business. Before this subject was topical, relevant, or much discussed, we had set a minimum FOB Origin price of US$1.80/lb for Arabica coffee, below which we will not buy coffee. We trade NO coffee on contracts connected to the New York C commodity market. None. The majority of green coffee importers and traders will not be able to make this categorical statement. Every roaster should ask their importer / merchant / trader if they ever buy coffee on Price to Be Fixed (PTBF) contracts or if they offer seller’s call Price to be Fixed contracts versus the New York C market. These sorts of contracts distort the relationship between supply and demand and contribute to volatility. Above all, they have absolutely nothing to do with the actual cost of producing coffee.

The ONLY way to guarantee a fair and sustainable outright final contract price is to ONLY buy at outright prices, and that is what Mercanta does. Further, while we never pay below US$1.80/lb FOB for Arabica origin purchases, we also track prices globally for all our purchases year-on-year, and our global average purchase price actually ranges annually between $2.25 and $2.50/lb and is currently easily double the current commodity price for coffee.

No Price to Be Fixed contracts versus New York C commodity market. Minimum outright price paid for all origin Arabica coffee purchases.

We based $1.80/lb on the $1.50/lb generous production cost price (many producers would produce coffee at less than this cost, and some would be more) plus 20% – simple, understandable, and traceable. On farms where the cost of production exceeds $1.50/lb, we make that adjustment accordingly and in discussion with the producer.

Mercanta do not have all the answers. It is extremely frustrating to have been in the coffee business for 35 years, longer than many participants in today’s industry have been alive, and to still be talking about the plague of low, unsustainable prices, despite the obvious boom in worldwide interest in coffee, and the emergence of a distinct and growing specialty coffee sector.

The unfortunate and inconvenient truth remains: the agricultural product coffee is overproduced, and efforts to address the low unsustainable price for coffee need to address production side economics and not consumption side miracles that have not appeared in the three and a half decades I have been involved in the coffee industry.

Sustainable, ‘fair’ purchasing at origin is possible, but it will have little impact on the global commodity coffee price. The genuine sustainable specialty coffee sector is small. Mercanta and others can act as beacons and examples of how genuine, authentically sustainable pricing at origin is possible.

Let us not be mislead or enchanted by certain claims from buyers who illustrate one, two or three ”direct” purchases at $3-$5/lb for a handful of bags from headline farms, while the rest of the coffee purchase portfolio could be at any price. These prices are laudable, but they are rarely paid across the board.

Mercanta has a commitment to make every single Arabica coffee purchase at origin at no less than US$1.80/lb FOB origin. Every purchase, not just some. And to repeat: we can track our annual purchases of some 100+ containers per year and work out the average price we pay. This average purchase price in 2018 was easily double the current commodity coffee price and does NOT apply to simply a handful of headline purchases but rather to all the coffees we buy annually.

At times like this, we feel the Mercanta Minimum Origin Purchase Price commitment is more important than ever, a genuine and tangible commitment to do our part in difficult times, and hopefully an example of one way to address the reality of unsustainable coffee prices.