This is not the first time we have written about the base coffee price (and probably won’t be the last). Having read the brilliant article by Alejandro from Caravela – A Pivotal Moment for Specialty Coffee, I (Warren Machanik) as a representative of Quaffee, felt the need to put the below on the web.
The complete article from Alejandro is posted below for reference (with his approval),
We recommend you read that article, it is a far better take on the coffee market, but as a response…
What is the C-Market
We have posted about this before, but just in case you are unsure, the C-market is the traded commodity price of not just coffee but all commodities. In coffee, when we talk about C-market price, we mean the C-market price of coffee. Also called the coffee futures price, or the price of the coffee contracts that are traded on the various stock markets (typically New York for Arabica and London for Robusta).
This price is typically used as a base price to set most other commodity-based prices of coffee. So if the price is $2/lb then the Fairtrade price will have a “levy” of say 20c and perhaps the organic certification will have a levy of 5c, RFA 7c etc. Not all coffee prices are set like that. Most of the real specialty coffee is independent of the C-market price, at least the starting point is. Competition, auction, relationship and direct traded specialty coffee (to name a few) have typically seen the C-market only as a reference to what was happening to the rest of the market.
We at Quaffee have always to be keen to reward quality, regardless of what the c-market price is (as a note we typically pay double or more the c-market price, on average we pay three times more for our 4-star coffees – see our page on transparency or on pricing).
Link to public perception
However, while we have preferred to pay for value when we can, the fact is at least 80% of the market has its retail price linked to the c-market. And we have seen this. In 2011, the c-market price was climbing, and 6 months later coffee on the shelf jumped from R40 / 250g to R55 / 250g (standard commodity). Specialty coffees were also effected, jumping from R80 / 250 to R120 / 250g. Since then, we have seen coffee prices on both sides increase, even though the C-market has returned to madly low levels again. The dollar strength may have helped the producers a little, even though the price per pound has slipped to levels that are some of the lowest ever.
With the commodity price at its low, there is less pressure on the entry level players to change their prices, since their only unique selling preposition (besides branding) is price. A rising tide raises all boats, but a lowering tide lowers all boats too. And that is the rub.
Liveable wage / or is it worth it
What all coffee consumers need to remember is that coffee is a luxury. No one needs coffee. Putting on a T-shirt, or sticking on a bumper sticker says, “Life’s too short to drink bad coffee” and the like, does not change that fact. However, when you are gulping down your next cup, consider those that actually need coffee to eat, to pay bills, to live, the producers.
While specialty has done an impressive job in increasing prices to the producer, the fact that 80% of the coffee world’s livelihood is linked to the whim of a group of day traders, must make a coffee drinker think twice. Coffee production on large scale (think Brazil, Vietnam, and northern Colombia) is the only coffee that can be produced at a decent profit at the low prices that the C-market hovers at. The rest of the coffee producers are small-scale farmers who production, labour and sundry costs are not covered at the average C-market price.
This results in many coffee farmers abandoning their farms. With the C-market at the price of $2 or more, some producers will feel it is worthwhile going back to the land, to produce a coffee for those that think they have the right to enjoy at the current prices.
What to do?
While the effects of the C-market now being over $2/pound for the first time in 10 years, the ripple effects will take 6-8 months to hit the consumer. We at Quaffee would love to see this as the new low. Even though we have been happy to pay over $4/lb for FOB coffee, we have seen that as soon as we spend over $6/lb we struggle to sell the coffee into the South African market.
Coffee consumers need to become more aware about where their money goes when they consume something that is a luxury. If you enjoy a luxury item, then you need to consider the chain of events to get it to your hand, and mouth.
We started posting transparency information about our coffee in 2015, and now all our coffees (besides the blends) have a footer where all the transparency information we can post is there. We need more consumers to be conscious of what they consume, rather just consuming it. Conscious about the product, the packaging and vote with their feet and bucks.
We know there are more important things in life to worry about, but we just ask you to spread the word, and help the industry survive. At the prices we have seen, coffee is not sustainable. Long may we see these prices increase.
Post from Caravela – Reposted in its entirety
A Pivotal Moment for Specialty Coffee
by: Alejandro Cadena (Co-founder & CEO – Caravela)
Over the last few days, we have witnessed the C-Market reach a high of $2.17/lb., a level last seen in October 2014, almost 7 years ago. Since that last high, the market declined to a low of almost 80 cents in April 2019 and remained around the $1.00/lb. mark for more than two and a half years. Despite the ups and downs of the C-Market (called volatility in financial parlance), the average price of the last 10 years has been $1.39/lb. and since Caravela started business, in May 2000, the average price has been $1.22/lb., with a high of $3.04/lb. in May 2011 and a low of $0.41/lb. in December 2001. What these numbers tells us is that we can see much higher prices in the next few days, but that these prices generally do not last too long.
Source: The ICE.
Frankly, it makes me happy to see coffee prices pass the two-dollar mark. Even though high prices tend to make our life as an exporter/importer much harder, I wish they could stay above that mark for the foreseeable future. In times like these, when prices rise so fast, growers rush to sell their coffee to the commodity market to take advantage of a windfall that they know very well will not last much longer. I cannot blame them for making that decision, rushing to market with whatever they have instead of picking only ripe cherries and drying their coffee slowly to produce an 84+ coffee. The reality they have faced for the last 30 years is that their costs continue to increase above inflation, but prices paid to them do not follow that same pattern.
In the last three decades, producing coffee has not become any easier – at least not for the average Latin American smallholder farmer. On the contrary, every year it becomes harder due to lack of labor to pick it or the unpredictable weather patterns that we live with now (just ask the Brazilian coffee farmers who lost their trees because of the frost last week). And let’s not even mention the infamous roya or the dreaded broca.
Coffee prices since the 1970s have been on average very stable, and despite inflation and a growing demand for coffee all over the world, the commodity price of coffee has not risen in the last 50+ years. The average price of green coffee in 1977 was $2.50/lb. but adjusted for inflation would equate to a price today of near $10/lb. Meanwhile, a barrel of oil has been substantially more expensive in the last 20 years than in the previous century. And yet car sales (and prices) have continued to rise, while the car industry has invested heavily in technology to offer consumers better fuel efficiency and safety features, benefitting consumers and car companies. One could argue that the specialty coffee industry in one way or another has benefited from the fact that coffee is a cheap commodity, even at the specialty level. With few notable exceptions, this benefit has largely come at the expense of the weakest actor of the supply chain, the coffee farmer, who despite being asked for more than it was asked for twenty years ago, continues to be a price taker.
Even though green coffee prices have not moved upwards in these 20 years, retail prices in that same period have increased. When I started working in the coffee industry 20 years ago, a 16oz bag of specialty coffee in the USA would be priced around $10/lb. Today, 16oz bags are not easily found as most roasters moved in the 2010’s to 12oz – and some are even now offering 10oz bags. That same 1 lb. bag today costs around $25/lb., more than double than what it cost twenty years ago. And I think everyone would agree with me that coffee today is of much higher quality (on average) than it was twenty years ago. In the meantime, real prices for coffee growers have not improved, as you can see in the graph below, which shows the inflation adjusted (real) prices for Colombian growers. On the contrary, they have hovered down.
I presume that a lot of roasters are not happy to see prices go up. The pandemic hit some roasters hard, and raising prices is the last thing they want to do today. I personally disagree. I think this is an opportunity that the specialty coffee industry must capitalize, to reset the meaning and value of specialty coffee, for the entire industry. Twenty years ago, the 40 cents per lb. market was seen as an opportunity for a few pioneering companies to develop the direct trade movement, where roasters were willing to pay much higher prices for higher quality and develop long-term relationships with like-minded coffee producers. This movement inspired many people to start roasting coffee or opening coffee shops around the world. Caravela would probably not exist today if history would have been different.
Unfortunately, after the increase in prices of 2011, and the increased competition, as well as many other factors that are not worth mentioning here, the specialty coffee industry started moving in the opposite direction, looking for cheaper coffee. It should be different this time!
Let Us Capitalize the Moment
Coffee roasters, and in particular specialty coffee roasters, should embrace this moment as an opportunity to decouple themselves from “the market”, raise their retail prices and engage consumers around the idea that paying unbelievably cheap prices for specialty coffee is an outdated and exploitative practice where everyone ends up losing. And that if it remains cheap, most smallholder farmers out there, who are responsible for a vast majority of the coffee they drink every day, will not be here in 20 years. The new FOB minimum price for an 84-point green coffee should be $3.50/lb., while an 86-point coffee should fetch $5.00/lb. And the new average retail price for a 12oz bag of 86-point single-origin coffee should be $35/lb., while a 12oz cup of filter coffee should be worth $5.00 (or more, considering that a glass of wine and beer are generally more expensive but require much less effort to produce and serve).
Yes. If you increase prices, some of your customers will go looking elsewhere, unwilling to pay twice as much for their coffee. But aren’t those just not the consumers we want or need? And isn’t this an opportunity to help consumers understand why paying more for coffee is the right thing to do, especially at a time when people are asking for more equality in the world?
These prices would not only allow coffee growers to earn a profitable and sustainable income, but also pay farmworkers a living wage, and pay decent incomes to baristas, roasters, and everyone in between. Keeping gross margins equal (in percentage terms), a roaster and a coffee shop would be able to make more money, even if some consumers go looking elsewhere. This is the opportunity for the specialty industry to really become the agent for change that it so much says it wants to be. An opportunity to focus on constant improvements that benefit all of us, instead of on how to decrease your COGS (the race to the bottom). A moment, that extends into a movement, and invites everyone to win!