The global arabica coffee price is at a 12-year low and many many producers are not able to turn a profit selling at this level. Their families are suffering and this will get worse if prices remain low. The thing is, this isn’t a new problem. It’s a problematic manifestation of a system in which all producers have willingly participated for years. No one said anything in 2014 when prices fluctuated between $1.60-2.10, nor in 2016-2017 when the C-price hit $1.71. But the global mechanism has always held within it the potential to hit us with $.97 C-price given overproduction conditions.
Do you ever remember as a kid doing something, say drinking juice on the sofa, for example. Your mom never said anything. But then that one time you spilled your juice on the sofa… WHAT ON EARTH MADE YOU THINK IT WAS A GOOD IDEA TO DRINK JUICE ON THE SOFA?!?! So unfair, right? This is kind of like that.
C-Market
The “C-market” is a well-intended system created with the goal of bringing efficiency to globally-traded coffee and offering protection mechanisms to supply chain actors. However, the result has been some protection for traders with means, and has been hijacked by hedge funds and other speculators, causing wild swings disproportionate to supply-demand movements. This has left unhedged smallholder farmers to bear the brunt while the rest of the supply chain enjoys healthy margins. It has also damaged the smallholder psyche, causing them to behave more irrationally like gamblers or jewel prospectors than farmers. Today amid market volatility farmers speculate and let coffee fade, take losses and go deep into debt hoping for an uptick, and when there is a windfall, they are less likely to invest in the next year’s crop, unsure whether it will be sold for a loss.
Nevertheless, even the speculators bets are based on real supply and demand, which are going to determine (base) price no matter what we do.
This system has been in place for some time, and some in the industry have been clamoring about the impact of speculators the lack of commoditization in many segments of green coffee. Since a prized Huehuetenango honey-process microlot doesn’t have much to do with washed Cerrado with 50 containers on offer in Santos, why should they use the same base price? However, the vast majority only takes notice when it’s too late. Now we are trying to fix the roof during monsoon season.
While most smallholder farmers only look at top-line price, their economic sustainability has more to do with production cost and price stability. Paying them a generous differential, say 30 US cents per pound, and gloating in a CSR report about it loses meaning when production costs are 40 cents per pound over current base price.
Farmers’ inputs do not depend on the C-price. Consumers do not purchase Flat Whites and bags of whole-bean based on the C-price. If roasters were to insist on fixed pricing to farmers, signing fixed contracts with their importers, and if importers were to verify payments by their exporters to producers, it would be feasible to simply bypass the futures market and offer farmers a fixed portion of the roaster price.
One potential solution for some: long-term fixed-price contracts
Multi-year fixed-price contracts operated from farm to roaster would de-risk much of coffee production and sourcing without the need for hedging instruments. Personal trust and transparency are fundamental to these contracts holding up. This kind of operation was impossible several decades ago, but with today’s technology, traceability protocols, and ease of travel and communication, it’s a viable option in many segments of the industry.
The downside is that with fixed supply agreements in place, roasters cannot take advantage of low prices to widen margins, and farmers must abstain if the local price floats higher than their contracted price. This will be a bumpy culture shift.
While this would feasibly de-commoditize some specialty grades if widely adopted, the vast majority of farmers producing commodity-grade coffee would probably be left out in the cold. Coffee advocates from Perú to Papua New Guinea are demanding (artificially) higher prices because farmers can’t turn a profit. Artificially supporting prices without holding back supply or creating new demand will only lead to more overproduction (world surplus that cause prices to fall) and eventually the house of cards will implode. The fact is, Brazil can now produce conventional mild arabica much cheaper than the rest of Latin America and most of the world. They won. If other producers can’t reduce their cost structures or add value to their product worth price premiums that make coffee farming worthwhile, they are, unfortunately, simply out of the market. It’s a bummer. Will this cause serious social and demographic problems? Absolutely. My point is, we should be focusing on pivoting and solving tomorrow’s problems as well as the real root causes of today’s problems. Let’s work de de-commoditize certain types of coffee that have nothing to do with base quality. Let’s give farmers more stable, profitable alternatives to coffee like cardamom, avocados, and citrus. Let’s open new channels for specialty producers to access markets that do value their product. And let’s ease the transition away from farming altogether for those who make the decision to pack it up.
It’s already monsoon season and our thatched roof is leaking like a sieve. We need to dig drainage canals and look into other roofing materials. Throwing more and more palm fronds on top is just going to make the eventual collapse and flood worse when it inevitably comes.
What do I think is the best way we can help individually in addition to conscientious sourcing? You didn’t ask, but Ill tell you anyway.
Financial education for small-scale coffee farmers that teaches them to think like the independent small business owners they are. We and the No Free Refills team are hard at work developing and testing a workshop and individual assistance program called Finca Emprendedora focusing on costing, budgeting, understanding global markets, and cost-benefit analysis. As soon as the pilot implementation is finished and necessary adjustments are made, we will be looking for fiscal sponsorship and volunteers to begin to implement on a large scale. Interested in getting involved? Please contact karl@directorigin.com
