You may have noticed a sharp increase in the C-market lately. The current situation in the coffee futures market is not unfamiliar to most of us who have been in the industry for some years. The implications beyond the current cost of coffee can be given less immediate thought but we believe can often have a more devastating long-term impact on our industry.
We would be remiss to not first discuss the backdrop to the current situation, and the speculation regarding the months to come that have and are impacting the current price movements.
Back in May, and for some months following there was political unrest and protests across Colombia. Roads were blocked preventing transport in and out of coffee producing areas primarily across the south. The protests also blocked roads leading to the main ports of Buenaventura and Cartagena. This brought exports to a standstill.
In addition, the harvest across Colombia was late and in fact smaller than usual. There was abnormally high rainfall which reduced yield. In these situations the coffee tree becomes a pump, working to remove water from the soil to save its roots from drowning. As a result, the tree suspends the task of producing flowers, and no flowers means no cherries. This has caused low production for the current crop.
High rainfall is predicted for the next harvest too, which means another year of lower yields. This expectation creates pressure internally and impacts pricing.
Brazil has experienced below average rainfall since at least as far back as October 2019. For the rainy season of November-March 2020/2021 the country had remarkably low rainfall, and this was followed by a drought in May and June of 2021. As a result, it was expected that 20-30% of the crop would be lost.
In addition to the drought came three rounds of frost across Southern Brazil in July, causing further loss of the current crop. Even more devastating is the destruction seen across farms where nearly whole trees were destroyed. Some farmers are losing their entire farm while others will have to prune aggressively and suffer a loss of production in the 2022 crop, and potentially beyond.
The impact of the lost production on the current crop and an awareness that the impacts will continue into the future crops have put pressure on the global supply of Arabica coffee and the market is responding to this.
The rising coffee futures market’s impact is far beyond the impact on price alone. It creates instability for producers and increased risk for buyers, and has the potential to cause strain on these relationships.
It makes sense to assume that higher coffee prices mean a higher income for producers, but this is not the case. Producers are earning more money but on a significantly lower volume of coffee, while their cost of production remains the same as they have already invested in inputs and labour to cultivate a full yield. Additionally, cost of production is increasing as the local currencies gain against the USD, impacting the cost of imported goods and pushing inflation.
There is an element of panic in a market like the current one, where producers are in a hurry to sell their coffee at the higher prices they are seeing. Both because they are scared these prices will fall from one day to the next, and because they are under pressure to make up on price where they have lost in volume. This impacts the quality of the coffee because producers do not take the time to dry their coffees sufficiently or sort their coffees to the level the market would usually demand. The commercial market cares less about a drop in quality and begins to compete with the specialty market, as the premiums the specialty market used to pay are absorbed and sometimes surpassed by the increased market price.
The extent of the impact of this market on buyers will vary. While increased prices will increase the risks for all of us, where the emphasis has always been and continues to be on quality and there are strong relationships with producers and with the market you are selling to, there is greater tolerance for the prices required to meet the same quality levels. The key will be in remaining vigilant to assessment of quality and in communication across the supply chain. Where buyers have been less concerned with quality in the past and more focused on price, they will experience dramatic increases in price and not in quality. This closes the price gap between lower qualities and higher quality coffees, which you would think would be cause for roasters to reassess their purchasing strategy.
We have discussed in detail Colombia and Brazil as they are impactful on the market for different reasons and both currently in harvest. However, the coffee futures market increase in price is impacting all coffee producing countries.