How Far Will Prices Fall?
By Bethany Haye
A longtime conundrum in the coffee industry has been the disconnect between low stocks and decreasing production of arabica worldwide (very small localized increases, for example in Colombia in 2016 -2017 notwithstanding) and the disastrously low prices obtained by growers’ co-operatives for this increasingly high-demand product.
According to Conservation International, coffee is the most widely traded tropical agriculture commodity on earth. Expanding consumption, in terms of both quantity and quality, and higher prices paid at the point of consumption in main importing regions US and Europe, have spurred phenomenal growth in the retail end of the sector, with global market value of coffee expected to rise 5.5% in the next five years.
Yet international coffee prices in August 2018 were down 20.1% compared to August 2017, averaging a pitiful $1.02 per pound and falling as low as $0.95. This decline is linked primarily to market fundamentals, though fluctuations in exchange rates and futures markets also have an impact.
The monthly average of the ICO composite indicator fell by 2.9% to $1.07/lb. in July 2018. This is the lowest monthly average for July since 2007, according to the International Coffee Organization (ICO).
On the other hand, world coffee consumption has steadily grown at an average annual rate of 2%, increasing from 90 million 60-kilo bags in 1990/91 to an estimated 162 million bags in 2017/18. Globally coffee is valued at $300 billion.
So, how is it that the grower is pocketing an ever-decreasing share of all that revenue?
Obviously, there’s a complex web of forces along the entire length of the supply chain at work.
Number one is the downward pressure exercised by commodities markets. Which is why in a joint statement from Brasilia on 27 August, Brazilian and Colombian agriculture ministers and agencies stressed the importance of taking control of coffee stocks.
“Producing countries must develop internal policies to support the ordering of the supply, such as the Funcafé in Brazil, which finances the carry of inventories to avoid sales in moments of depressed prices,” reads the communiqué
This would also help to counter the crushing power of an increasingly concentrated distribution sector, which imposes abusive payment terms of more than 200 days on growers. This is catastrophic for financing day-to-day operations and for investing in the next year’s crop. (See p6, UpFront.)
Researchers at Cornell University who evaluated four cooperatives in Peru, Honduras, Colombia, and Mexico found “the best case scenario for a Latin American farmer is receipt of 87% of the export value.” That is not enough to cover costs of farm equipment, land, and water improvements, fees to market and sell the coffee and to service debt. It’s no wonder farmers are dropping coffee for other crops.
But that’s not the whole picture.
Increased production costs
Ironically, many of these costs reflect positive trends. A necessary but cost-incurring switch to sustainable production and the rise in labor costs - both crucial to improving environmental and socio-economic conditions for rural populations, have added to the growers’ burden.
In 2016, production costs finally overtook sale prices in a majority of coffee-producing regions worldwide, pushing the sector to a breaking point. The sector is locked in a vicious circle: the lower the price paid, the less incentive farmers have to grow coffee and the higher the rate of attrition in family-owned farms. And hence, lower production.
Government action
In Colombia, where coffee is the third- largest export by revenue, and where 556,000 smallholders grow the coffee, the senate is preparing a bill to subsidize fair prices and assure farmers of many of the country’s main crops and livestock a livable income.
The National Federation of Coffee Growers of Colombia chairman Roberto Velez recognizes that it’s impossible to go back to the days in the 1960s and 1970s when a coffee grower with 20 hectares was a wealthy man.
“Today we have a fundamentally changed world economy, a new macroeconomic environment,” he said. For him “in that context, the former sustainability fund needed to become a stabilization fund, meaning that when prices are high you collect some revenue, and when prices fall, simply give that money back to the grower. This will establish a ceiling and a floor for prices.”
The retail sector can help
If more big retailers like Starbucks and 7-Eleven commit to buying 100% ethically sourced coffee (in partnerships with NGOs like Conservation International and Rainforest Alliance) then consumers in wealthy countries will automatically be supporting farmers in less wealthy places.
There are a growing number of ethical-coffee start-ups based on this principle. Specialty roaster and wholesaler Counter Culture Coffee’s latest sustainability report details its relationships with 67 different farmers and farmer groups, aiming to provide transparency into its environmental, social, and fiscal sustainability. It also provides information about each of the 354 coffee contracts the company made over the last two harvests. And in conjunction with the new report, it has launched “Frank”, a coffee meant to bring attention to the amount of money farmers make, in comparison with actual living wages.
As the business site, Tradeready noted, “consumers can send the message that ethical behavior is important to them” by choosing to support brands that verifiably implement ethical sourcing. 7-Eleven’s switch from an uncertified Colombian product to a new Rainforest Alliance Certified, single-origin Colombian coffee was largely based on research that found that close to 50% of Millennials consider sustainability important when choosing their java. The opposite is also true: socially conscious consumers can now easily use the internet to find ethical brands and avoid poor-practices brands.
The final step could be that the multi-billion dollar companies could price the retail product at the same level as their down-market, non-sustainable, low-wage competitors, lose some profits – or not, as they’ll gain market share – and switch the whole trend away from elite purchasers to the general population, allowing the less affluent to also buy in solidarity with their counterparts toiling in weaker economies.
To sum up, it would seem that there are four main paths to reversing the destruction wreaked by unstainable pricing:
1) Retain stocks within producing countries – and make policy collectively on the multi-country OPEC model. As the Brazil-Colombia joint statement emphasized: “The holders of coffee stocks have a great influence on the setting of international prices. Therefore, it is fundamental to correct the current imbalance, shifting the stocks from consuming countries to producing countries.”
2) Bring added value to producing regions via local (like Ascafé) and national associations (FNC) or foreign entities such as the UN, USAID, JICA, (Japan Foreign Aid agency), SDC (Switzerland) and home country government aid. Finance the building of internal infrastructure such as sorting and roasting facilities and education that goes beyond agronomy toward connoisseurship, as espoused by Ramiro Fajardo Moncada, rural sectional coordinator in the Quinini Department, Colombia.
“If we start the process of giving coffee added value, drying it sufficiently and converting it into parchment, doing a proper selection at harvest, [we can] realize excellent profits and things will surely start to change. Additionally, if we seek alternative markets for a portion of the farm’s production, for example selling futures, to threshers [mechanical harvesters] or to a distributor of threshed and processed, ready-to-prepare coffee, with previous knowledge of in-cup quality, income will increase,” said Moncada.
“We coffee producers have to go beyond knowing the physical qualities of our coffee and get to know the organoleptic qualities (smell, flavor, aroma)… recognize the characteristics of each lot, and then we will be able to demand better a price for our product,” he says.
3) Work to expand ethical – sustainable sourcing among retailers as part of the effort to switch control of stocks away from commodities markets. By selling directly to retailers, (Starbucks, illycaffé, Lavazza) traders could largely be eliminated from the mix.
4) More visible, direct communication to consumers, beyond packaging: TV and internet ads showing the correlation between low retail prices and bad practices, leading to fewer farmers growing coffee, leading to drop in production – leading to higher prices. And the message: you might as well support good practices sooner than later.