Last week’s interview with the New York Post was a quick one: J.M. Smucker, major producer of American grocery store retail coffee brands Millstone, Dunkin’ Donuts, Folgers and others announced a 6% price cut and smaller package sizes in order to attract customers lost in recent years’ price hikes. It’s a straightforward story of a major consumer packaged goods seller reducing retail costs for the purpose of wooing back customers lost to competition… or is it?
In the article, “Your morning coffee is about to get a little cheaper,” I’m quoted as saying that green coffee prices have “gone down dramatically this year,” and paraphrased as saying it’s surprising that this hasn’t happened sooner since the price spike of a few years ago. This is a reasonable approximation of my position on the matter coming from a 7 minute phone call and 500 word article but not exactly what I had meant to covey to newspaper readers, nor is the additionally paraphrased comment, “prices are expected to jump back up soon.” It’s not really that simple.
How low is too low?
Commodity coffee prices may or may not increase in the near future but by all practical accounts they should be higher. Ask any coffee farmer and he or she will tell you that the current price ($1.25/lb) is not sustainable for the long term. At this level, coffee farming becomes a money-losing business in most coffee producing regions; farmers begin switching to other more lucrative cash crops and skilled coffee farming labor leaves for better paying jobs elsewhere. Farm labor is already becoming an issue of increasing concern within the industry, as was cautioned recently by Michael Sheridan in his recent blog article, “Coffee’s Farmworker Problem: A Coming Crisis?” Long periods of low commodity prices only make the matter worse.
Complicating the matter even further is that coffee consumption is on the rise, driven by increased coffee drinking in traditional coffee producing countries like Brazil and India and emerging consumer markets like China and Russia that are swapping daily cups of tea for coffee. As pointed out by Mauricio Galindo, Director of Operations for the International Coffee Organization at the recent Re;co coffee symposium in Gothenburg, coffee consumption is increasing at a rate faster than production, though he notes that estimates of production quantities are unreliable (also unsettling). What we do know now is that the buildup of stocks from the past few bumper crop years of production in Brazil are mostly gone, making commodity exchange prices increasingly volatile. In the current situation of increased demand for coffee, low stocks, worker shortages or farmers leaving coffee altogether for more profitable businesses, it seems reasonable to expect that prices will be on the rebound soon.
Answering the question of why other roasted coffee brands did not lower prices sooner to follow the markets down, as I told the reporter, I don’t know and if I had advised a public company on the matter I could not tell him anyway. My speculation is that in addition to short term profit taking or financial recovery from the sudden increase in costs from 2009 to 2010 most large manufacturers see the same market conditions that I’ve noted above and are preparing for the future.
Consumers need to prepare themselves for drastically higher coffee prices than they’ve historically enjoyed. The new normal is coming.
Thanks for the clarification. It’s a hard subject and much debated over the years. Pure supply demand analysis in historical context suggest that the market “should” be a solic 30 cents higher but when the market is not doing what it seems like it should for an extended period, usually it is trying to tell us something that perhaps we are overlooking. While many blame speculation in my view it is something more fundamental. (Why would a speculator fight the underlying trend…there’s a lot less resistance/more money to be made going with the trend.) One possible explanation – maybe pod consumption is having a bigger negative impact on demand (expressed in green coffee tonnage) than people realize, offsetting some of those consumption gains you spoke of. Or the strength of the dollar (vs Brazil, up about 45% in 5 years, somewhat more than local inflation…so prices to a Brazilian grower might be a little better than they appear depending on his own personal inflation rate.)
Traditional commodity wisdom is that the cure for low prices is, well, low prices. Just as you say, lowering prices helps consumption, hurts supply, and once that starts to bite, the trend can turn around sharply. If Smuckers lowered prices, others surely will as well. (And once coffee prices start to turn around, it will be accelerated as short speculators unwind their positions by buying back or even going long.) The question is how much damage is done in the meantime. A money losing coffee farm converted to a strip mall isn’t coming back, ever.
Continued downstream support of sustainable coffees, wilingness to pay a premium during times of low prices, is the best insurance that our coffee will always be there for us.