Record high prices challenge consumers and roasters alike, but what’s behind the run-up?
By now I’m sure many have seen stories on how far and fast the price of green coffee has shot up. Similar to other commodities (crude oil, soybeans, etc.), coffee prices are always in flux, but during the past year they’ve reached the highest levels seen in more than a generation.
The base price for green coffee is determined on commodity exchanges in the U.S. and Europe. Called the “C” price, it is the reference point from which the minimum selling prices of all grades of green coffee are hinged.
Last June, the C hovered in the vicinity of $1.30/lb. By last month it had more than doubled, to $2.96 a pound.
In part, the run up is the result of poor weather and reduced harvests in Central America, Colombia and Africa. Yields from Brazil, the world’s largest producer, are also down this year. Add in the declining value of the dollar and it’s little wonder prices are up.
At the same time, consumer demand remains strong everywhere, especially in China, India and Japan where it is growing rapidly. All of this puts upward pressure on prices as buyers compete for a shrinking number of beans. It’s supply and demand at work, and that’s OK. But other players are in the game now, and their presence distorts any chance we have of buying in a balanced market.
ENTER THE SPECULATORS
In recent years, deregulation efforts have allowed financial speculators to enter commodity markets, and their purely profit-driven actions are distorting whatever chance we might have of returning to a more rational marketplace. The impact is increasingly apparent in all commodities, from food to oil. I know it’s easy to pick on the investment community these days, but the fact is that their continued meddling in the commodity markets is bad news for today’s prices, and bodes little good for tomorrow.
In the case of coffee, speculators buy and sell coffee futures with no intention of ever physically owning the beans they trade in. The goal is to make money in short term paper trades and to be out of the market before the contracts come due and they have to take physical possession. They never intend to actually own any coffee, so the impact of their actions is of little concern. So long as profits can be made along the way and the real world costs get passed along to the rest of us, speculators are happy to make their money and run.
Last month, in an interview for CNBC’s Wall Street Journal Report, Starbucks CEO Howard Schultz told Maria Bartiromo: “I’ve been in this business for 30 years. I can tell you unequivocally with every coffee farmer and resource that we talk to in which we have decades of relationships, we cannot identify a supply problem in the world where we’re buying coffee. So one question is, ‘why are coffee prices going up?’ and in addition to that, ‘why is every commodity price going up at the same time?’ Why is cotton, corn, wheat, why? And I think what’s going on is financial engineering; that financial speculators have come into the commodity markets and drove these prices up to historic levels and as a result of that the consumer is suffering.”
While the exact impact of speculation in the coffee market is difficult to gauge, it’s clear that a good deal of the recent run-up has little or nothing at all to do with real world supply and demand, and a whole lot to do with speculators’ desire to make money. As a result, price has become uncoupled from the historic checks and balances of the marketplace as a portion of what we pay for every cup is funneled off to Wall Street.
THE ADDED COST OF QUALITY
Specialty beans, the superior quality raw coffees we buy, have traded at a premium to the C price since the the specialty market began in the 1980s. Certified beans, such as organic and fair trade, incur additional price premiums. As a result, specialty market green beans now easily cost from $3.50 to six dollars a pound and up, plus shipping and other related charges.
Big chains, independent cafes and roasters of all sizes have been forced to raise prices on everything from roasted beans to brewed and espresso beverages, and we’re certainly not immune. We’re committed to keeping our prices competitive and affordable, and we have to be realistic about the effects these hikes have on our ability to stay in business.
As a result, any increases you see in our prices will only be on beans we’ve had to purchase at these crazy and hopefully short-lived levels – not on those we were able to buy on more favorable terms or those we hope to be able to buy at lower prices in the future. As always, we’ll absorb all the increases we reasonably can while we continue to search out new coffees for your enjoyment. It’s a promise.
