It seems like everything is rising at the moment: the cost of living; food costs; heating and more. And yes, we’re now here to tell you that even your cup of coffee is going up in price too. However, unlike most things, there is a good reason for this if we’re to continue to support equitable supply chains in coffee. Remaining super transparent and open, we wanted to share as to why this is happening, and provide some of the nitty gritty here if you want to get down in the details and learn more about how the Arabica coffee market operates.
Freshly picked coffee cherries in Huabal, Peru.
So what has been happening in the world of coffee and how does it affect prices?
Many things happened in 2021 that have brought many unexpected challenges for coffee production and logistics worldwide.
In the summer of 2021, major frost in Brazil not only wiped out a large portion of the year’s production but also caused serious damage to many coffees trees which will need to be pruned or replaced. Planting a new tree can take 3 to 5 years for yields to be restored. If pruned, it still takes 1 - 2 years to bring it back to full production.
Coffee trees at a Brazilian coffee estate, usually bright green, damaged by frost. Image from Reuters.
Heavy rains in Colombia have caused an overall drop in production volume compared to previous harvests and supply chains have been severely disrupted by political unrest and anti-government protests. Overall this has resulted in a rise of the local coffee “precio”, or internal market price.
In virtually all producing countries, growers have been facing already problematic labour shortages exacerbated by Covid, causing increases in costs of picking and processing. Inflation of prices for food, pesticides and fertilisers have caused an increase in overall costs of production and living.
Global disruptions of shipping routes and subsequent shortage of containers are driving up shipping costs. In sum, containers are in the wrong ports, so containers that would normally be replenished with cargo to take to its destination are instead shipped empty to where they are needed due to high demand, which further increases cost.
Brazil and Colombia are the world’s largest producers of Arabica coffee accounting for the majority of its global supply. Events in these countries have a significant impact on the world coffee market and the drop in production has caused a major drop in the global availability of Arabica coffee. In short, there is not enough coffee supply in the world to meet the current demand which is one of the main reasons why the C-price for green coffee is now at its 10 year high.
What is the C-price and how does it relate to the price of speciality coffee?
There is a global exchange market - called the C-market in which Arabica coffee is bought and sold every day. Its primary function is to standardise and set rules for global coffee trade. The C-market provides a global benchmark price for coffee, the C-price, which is expressed in US dollars per pound (weight) FOB. FOB stands for “free on board”, meaning the price is inclusive of all costs that come before: harvesting, processing, drying, milling, storage, transport to port and loading onto a ship. In most instances there are multiple actors involved in this part of the supply stream - producers, cooperatives, washing stations, exporters, dry mill managers. It is very unusual that this is all managed by one entity, though it can be the case for some large estate farms.
It is important to note that the C-price acts as a reference, because it is not the final price paid for a coffee, but rather a portion of it. Various differentials can be added based on a particular country’s system, physical coffee quality and certification such as Organic or Rain Forest Alliance. This is not to be confused with Fair Trade which aims to set a floor price for coffee at $1.40/lb in order to provide a more stable and arguably a more sustainable price reference, and a safety net in times when C-price is low. These certifications come with their own challenges which would be a full blog post topic in itself. The C-price is known to be volatile by nature and historically it has remained below $2/lb, and on some occasions dropped down to $1/lb. The fluctuations and low prices make it difficult for producers to sustain their livelihoods and extremely hard to plan ahead or make investments on their farms.
When it comes to speciality grade coffee that we purchase and sell, the aim is to set prices that reflect the coffee’s cup quality based on physical and sensory attributes. The C-price would often still act as a reference but significant premiums reward quality and consistency of flavour with distinctive attributes. In ideal scenarios buyers (in most instances exporters/importers acting for or on behalf of their roaster clients) establish long term relationships with producers, producer groups or coops and transactions are based on dialogue and transparency to ensure all parties are satisfied with the price. The premiums paid for speciality grade coffee not only reward excellence but also cover higher production costs necessary to produce quality, such as selective picking, sorting and administrative costs related to ensure lot separation and transparency.
Over the last decade, the C-price remained generally low. This allowed speciality contracts to be set somewhat independently, and quality premiums served well to maintain a viable and more stable income for producers, whilst we have enjoyed outstanding flavour experiences. In 2021 the C-market rose to nearly $2.5/lb and continues to hover around $2.3-$2.4, where it is likely to stay for some time. This makes the difference between current commercial and usual speciality pricing very small.
So is the high market price good for producers? And what does it mean for quality?
In short yes, many producers are now paid more than they have been in over a decade which is a clear positive at farm level. It means they earn a better income and might be motivated to plant more coffee and invest in their farms. However, as we’ve noted at the start farmers are also faced with rising costs of living (ongoing impact of the pandemic) as well as increased cost of production and this will of course impact their bottom line.
High C-prices pose serious challenges to quality. As we’ve discussed, quality coffee is more labour intensive and more costly to produce. If the commercial versus speciality price differential is low, there is a reduced incentive to invest in the extra work if the return isn’t attractive, so quality can suffer.
Our importer partners have worked hard over many years to establish trust and a good history of paying fair prices even when the market is low and investing in support of local communities. This means managers of farmer associations and individual producers themselves are encouraged to maintain these relationships and quality. However, this can only work if the extra effort is still rewarded with premiums above the local market at any given time.
Drying coffee being carefully sorted at Raro Body washing station in Uraga, Ethiopia.
How does this affect us as roasters & our buying decisions?
Our main purpose is to bring you delicious coffee whilst supporting equitable supply streams. We strongly believe that producers need to be able to earn better value for their coffee in order to ensure continued production and hopefully achieve less volatile market conditions in the future. And of course, we don’t want to compromise on quality and the flavour experiences that fine coffees offer to our customers.
We have always paid prices that are reflective of the coffee’s quality and that means paying well above the market price, which has historically been low. Over the years, and with the help of our trusted importing partners, we have established relationships with producers and associations in multiple growing origins and we rely on each other to protect livelihoods and businesses. In conditions where the market price is high, in order to honour our existing supply streams, protect livelihoods and maintain quality, we still need to pay above the C-price to continue incentivising quality and cover its higher cost of production. To share some specific numbers, we are seeing increases in green coffee prices we pay of £1 - 3/kg. This is before we account for the natural loss of volume during coffee roasting (around 20%). We don’t want to compromise on quality nor do we want to abandon our producer partners and therefore are committing to paying these higher prices.
What does it mean for you?
As you can imagine, the obvious is inevitable - our coffee prices to you will need to increase in line with the increases to our cost in order to keep operating in a sustainable way. We have taken steps to mitigate costs such as warehouse storage in the UK by increasing the stock we carry in our premises and have squeezed our margins to soften the price increase to you as much as we can.
We are very lucky to have very engaged customers like yourselves who will without a doubt understand the situation. We are incredibly grateful for your support of our quest in making coffee better for everyone. Your custom remains vital and together we can continue to protect livelihoods of quite literally thousands of producers and ensure that everyone in our hardworking team is earning above the real living wage.
