Earlier this week I shared comments with a coffee industry publication regarding truth and fiction surrounding today’s higher coffee prices and the prospect of future shortages. The article will probably pull a few of my words that are quote-worthy, but I thought that it may be nice to share my fully interpretation of what is happening right now:
We have three forces at work that have been widely credited with inflating coffee prices in recent months:
- reports of coffee shortages,
- reports of increased consumption, specifically within producing countries, and
- an institutional investor gold rush to commodities as a hedge for lagging securities.
This confluence of events has created what leading analysts have called “a perfect storm,” scenario to increase commodity prices.
Consumption of specialty coffee has been on the rise for a decade and no farmer will ever willingly admit to having a good year, but I have never before witnessed reports continually move the market higher as they have since this past summer.
Production in Colombia will be negatively affected by rain damage and mold, and have personally witnessed the extreme drought conditions in parts of Brazil, but do not believe that the supply and demand are causing current market conditions. In my opinion, the primary factor driving prices higher is investor speculation, which I expect will eventually ease as global securities markets recover, thus presenting money-making opportunities elsewhere for institutional funds.
Yes, it has been challenging to buy larger quantities of specialty coffee for my clients over the past several months, but primarily as the result of price sensitivity rather than lack of adequate supply. I do not anticipate any significant global shortage of specialty coffee at origin for companies buying direct; however smaller roasters may be hampered by lingering credit restrictions and local availability as importers trim product offerings due to the larger cash outlay required. There are still many good coffees to be had and specialty coffees in particular have not increased in price at the same rate as commodity coffees, thus making them a better value than before. Despite initial reports to the contrary, the sky is still firmly in position.
There is one larger question that I believe has been overlooked by the market: is $2.00 ‘C’ market coffee an unreasonable spike or an appropriate adjustment? Historical price data shows that ‘the C’ has increased at a rate roughly commensurate with the cost of inflation since its creation with the occasional anomalous rise and fall, so we’re essentially paying the same price for coffee as back in 1979, but our market has matured and average quality improved substantially since that time. One can argue that the cost of coffee has been artificially low until very recently.
Are high coffee prices really a bad thing if the market remains stable?
Roasters and retailers alike should raise consumer prices immediately to reflect the real cost of operating today rather than harm their businesses by absorbing losses with hope of a sudden green coffee price drop on favorable news. Only hindsight is 20/20 and there is no law of gravity that governs financial markets, so it is wise to accept reality and move forward with normal, profitable business. In future years the pendulum of production and consumption will continue sway, and we will be just fine.
Great post Andrew!
Being a small roaster, I’ve had no choice but to adjust my prices. Some wholesale customers have been upset, some are more understanding. Being such a small operation, I buy 2-3 jute’s at a time of any given variety. So I am at the mercy of the markets.
The big guys in town buy up all their coffees for the year at a time, leaving small operations like me at the obvious disadvantage. Thank God my coffees are a superior product to the “Big Brother” roasters.
Andy,
Crisp writing. Spot-on. Good advice on businesses moving costs to consumers. Too many businesses are swallowing that cost and it is going to backfire.
Dave
Unfortunately, as with all business, the increase in production costs is reflected in sales. That’s simply the general principle of supply and demand, and if a business wants to stay afloat in any market, they have to adhere to that principle in some form. What I would love to see is a rise in ecological preservation of areas that are known for coffee production. There has been so much talk of global warming destroying much of the coffee crops in several of these areas, not to mention the problem in Hawaii surrounding their Kona plantations. As a side note, I would also love to see an increase in US grown crops, perhaps improving on the problem in Hawaii as well as returning to Puerto Rico for growth (as it was back in the 50’s). Any thoughts?