Over the past few months, we have published a couple of articles relating to the recent rise in coffee prices.
In July’s Market Report, we shared the news that the C Market reached a six-year high of 209.50 c/lb due to speculation around the impact of frosts in Brazil. Last month, our blog post on the Ocean Freight Market explored the relationship between coffee prices and container availability.
With freight rates, currency exchange and the C Market all having an impact on the price of coffee, it can be challenging to understand the relationship between the numerous markets affecting coffee’s price. Most importantly, the impact this can have on roasters and producers.
So, let’s dive in and look under the skin at three markets and examine their changes over the past 24 months to understand better why the price of coffee is what it is today and what this means for people at both ends of the supply chain.
Key Market Changes
Below are three graphs. These indicate the macro changes of three key markets that have affected the price of green coffee between October 2019 and October 2021.
1. The US C Market Price
2. The Global Container Freight Index
3. GBP to USD Exchange Rates
At first glance, we can see immediately that the US C Market Price and the Container Freight Price have been on the rise since November 2020, with a sharper increase occurring in March/April this year. The GBP/USD currency exchange rate looks more stable but has also changed this year, increasingly slightly before plateauing.
Fundamentally, these graphs signify changes to coffee prices in the following ways:
1. An increase in the C Market means higher prices for roasters and producers.
2. An increase in shipping cost means higher prices for roasters, but not producers.
3. An increase in the GBP/USD currency exchange means lower prices for roasters
In this article, we won’t go into the reasons why these markets have changed. Instead, to learn more about market rates and currency exchange changes, check out our Coffee Market Report page or sign up for our Newsletter to receive these updates directly into your inbox every fortnight.
However, looking at these graphs side-by-side, it is easy to understand why, with higher C Market Prices and increases in the cost of shipping, green coffee prices have risen accordingly.
But what does this mean for roasters and producers, year on year?
A Study in Coffee Price
Examining the above graphs is an excellent way for us to see the market changes and how they can affect the price of coffee over time. But, with so many moving parts, applying this in real terms to the purchase and sales price of coffee can be tricky. Especially when we often return to the same coffee types year on year as we build relationships.
So, let’s take an example of one coffee and track the changes over three years to examine how these market changes might affect the price paid by the roaster and the price received by the producer.
For this, we will take a theoretical look at the same coffee, bought in the same month between 2019 and 2021 to see how the changes in the market might affect the producer growing the coffee and the roaster buying it. For this exercise, we will assume the differential remains the same to avoid added complexity. There are also contributing factors, such as local currency, cost of inputs and labour etc, that would affect producer profitability, however these I feel fall outside of the scope for this article
The data from the above graphs we will be using to track the price change is as follows.
Imagine, for example, a coffee roaster looks to buy an 85-point coffee through DRWakefield from a producer in Colombia in October 2019. At the time of contract, the C Market was sitting at 1.013, the Global Container Freight Index was at $1,238, and the GBP/USD currency exchange was 1.229, creating a price of £5.00/kg (ex-warehouse).
In October the following year, the same roaster contracts the same 85-point coffee at the same volume.
If we look at the graphs above, we can see that in October 2020, the C Market Price is similar to the previous year, just a bit higher at around 1.049. Shipping rates are also a little higher at $2,231.
The currency, however, is slightly better than 2019 – 1.29. This higher currency offsets the changes in market and shipping, bringing the £/kg price of the coffee down to £4.87. A good year for our roaster!
In October 2021, things change a little more drastically.
We can see that the C Market has increased significantly to 2.04, with the shipping costs increasing to $10,839. Unfortunately, the increase in the exchange rate at 1.372 isn’t sufficient to offset these higher market changes, so the same coffee now costs our roaster £6.61/kg—an increase of 32% from the 2019 price.
In this example, we can see how market changes can directly affect the price of coffee for a roaster—both positively and negatively.
But what does the same market changes look like for the producer in Colombia?
In October 2019, the producer sold their coffee for £5/kg, through DRWakefield, to the roaster. With the markets as they were, this equates to an FOB price of around 250.8 cents/lb. So, in our example, if we take the preparation cost between farm and shipment in Colombia at 35 cents/lb, the Farm Gate Price for this coffee sits at 215.8 cents/lb.
The following year, the C Market has improved slightly – rising from 1.013 to 1.049. Therefore, even though the price of the coffee for the roaster is lower, the price paid to the producer is higher.
For the same coffee, the farm gate price will be 219.4 cents/lb in 2020—an increase of 1.5% from the previous year for the producer. A win-win for producer and roaster!
In October 2021, just as the heightened changes in the C Market Price increased the price of coffee paid by the roaster, it increases the price received by the producer.
As the C Market sits at 2.04 in October 2021, the farm gate price has risen by 44% since 2019 – in keeping with the market – giving the producer a price of 318.5 cents/lb.
A Silver Lining for 2021?
A challenge for the coffee industry when coffee prices change is maintaining relationships. As coffee prices increase for roasters, it’s often hard to accommodate the business change or communicate inflation to customers. But it can help by understanding that the changing market can also affect people on the other end of the supply chain.
The rise in C Market Price can positively impact producers, just as it might negatively impact roasters.
However, the effect on rising coffee prices can be complex. The events that might cause the C Market to increase, such as adverse weather conditions, low volumes, shipping complications and inflation, also have an impact on profitability. The market volatility can also create promote the attractiveness of short term gains, with long term implications.
To understand this better, we reached out to a couple of partners at origin we work with to ask them this question: What does the C Market rise mean for you?
Here’s what we heard.
“For us, the increasing of coffee prices is an opportunity to pay back our loans. But this increase is also happening in all consumer products, so we receive more money, but also spend more on food, cost of production and labour. Sustainability depends on how long this increase will last, alongside reducing our costs and increasing production”
José Omar Rodríguez, Capucas, Honduras
“Coffee prices just started to rise due to climatic conditions this year, which interfere with agriculture production next year directly. There was frosty in some areas and a period of drought in most parts of coffee areas.
All of this interferes with the 2022 coffee crop. Historically the prices have never been so good to the Brazilian producers, however, they count on a decrease in production next crop, the raw material prices and the cost of manual labour increased, taking away part of the profit margin.
Another thing that has worried all the coffee production chain at this point is the difficulty with shipping the coffees, because of the freight prices and lack of containers and spaces on the vessels. This situation causes a severe problem for the export department workers, who became unable to keep up with the deadlines, which causes storage costs and financial loss to the company.
Generally speaking, the producers have been taking advantage of these prices, selling their crops at the best market moment, but without pressure, trying to get cash in hand in order to compensate the predictable next crop lost, due to volume or increase of costs production that probably will take place next year.”
Maria Dirceia Mendes, SMC, Brazil
Challenge vs Opportunity
Rising coffee prices can be seen as a challenge or opportunity, depending on your standpoint and the surrounding context.
In our industry, where better prices for producers have long been identified as a critical factor in safeguarding the sustainable future of coffee, is this rise in C Market a positive thing overall for coffee?
That one’s open to debate.
Although high coffee prices may be a challenge for some roasteries, others might see it as an opportunity to pay better money for the coffees they love and invest in the relationships they value.
Things are never that straightforward. And the complexities of C Market changes can have repercussions that can ripple through the whole industry – take, for example, the defaulting of contracts in Colombia caused by the recent surge in C Market Prices.
The C Market has its positives and negatives. And changes to the C Market can simultaneously be positive and negative for different people.
Amongst the doom and gloom of shipping rates, unusual weather patterns and coffee price hikes – could better coffee prices for producers be the silver lining for coffee in 2021?