Coffee prices are going up as demand for quality rises above supply

We have been hearing a lot lately about commodity prices soaring, from metals to sugar to gold and to coffee.  There is no doubt that speculation is playing a larger role than usual in these markets, but when it comes to agriculture there is an underlying reality behind the increases.  It is certainly the case for coffee.

Although retail and wholesale coffee prices have remained quite stable over the past decade, the price of raw exchange grade  coffee, traded on the commodities market (the “C”) has steadily risen, as can be seen in the graph below (price is shown in cents per pound).  Exchange grade coffee must be within a specified range of bean sizes, be limited to a specified number of defects per 300 grams and have no off-flavors due to contamination, such as mold.  This past spring the C was at $1.35 to $1.50 per lb. The C has climbed sharply since then  and is hovering around $2.00, a 40+% increase over last spring. This C price is the benchmark for  nearly all other coffees, even the coffees we purchase; the exceptions could be counted on the fingers of one hand .

A September CNN Money article, with graph, shows the steep incline of the last few months. Most companies, from commercial to specialty, have raised prices,only partially reflecting the price increases to them.

The price hikes  may have been helped along by speculators and the recent attractiveness of commodity investment, but the coffee increases are based on real events in the coffee world. A far-sighted article in FuturesMag.com, written in February 2010, warned of the coming storm. In a nutshell, world demand has been rising above supply for years and world reserves are dwindling due to long term under-pricing, which has discouraged growers from growing more, particularly in fast growing countries such as China (Starbucks is adding hundreds of cafes there in the coming year) and Brazil.

The shoe is on the other foot now: in the early years of this decade, C prices plummeted well below the cost of production and many farmers went bankrupt. There was little incentive to increase production anywhere under such circumstances. This disaster set up an exodus of farmers and their workers from Latin America into the United States. For many farmers, still deep in debt, the recent price increases are a long-awaited bittersweet godsend; bitter because in places like Kenya and Colombia production is way down, again.

Recent weather patterns have been a major negative contributor. Drought in East Africa and particularly Kenya last year, cut coffee production dramatically, raising Kenya’s prices to historic highs. Continuous rains followed this year and obliterated the traditional dry season.  This led to poor flowering and yet another record low production year.  In Colombia (traditionally second or third in world production), we have seen two terrible years of excess rains, cutting harvests dramatically and leading to much higher prices (differentials above the C) and somewhat lower quality—and little of that available. With a return to drier weather, this past spring, a fungal infestation called Rust (photo on right) set in, making quantity and quality production much harder. And now, in early December, all signs are that Colombia has plunged back into the worst rains in decades.  Central America, from Mexico to Panama, has had excessive rains this fall, extending into the early harvest—which could affect the coming crop. From coffee farmers’ perspective, climate change is here! There is no quick fix. Coffee is an agricultural product and a coffee plant typically takes four to five years to mature, so farmers can’t just plant more this year to increase supply next year.

Farmers supplying the still tiny but growing top-end quality market in the world have done better, for the most part, than those serving the mass market this decade. With the advent of Cup of Excellence (1999), a growing number of craft-driven farmers have found roasters like ourselves who are more than willing to pay substantial premiums above the cost of production or Fair Trade prices as an incentive to produce better qualities. Nevertheless, as common-quality coffee prices rise, the pressure is there to maintain the difference in prices. Otherwise there is little incentive to work harder to receive  an increasingly smaller difference  in price over common grade coffee.  Even more critical, higher prices are only partially compensating for drastically lower production in key quality-producing countries due to adverse weather.  High quality coffees may be in short supply over the next year or two.

With all this said quality coffee prices remain a bargain. For every $20 dollars paid per pound of coffee, a ten-ounce cup made at full strength in the home costs $0.80.  A ten dollar bottle of wine translates to $3.94 for 10 ounces.