Daily Archive for October 26th, 2010

Everybody’s Doing It (Worrying About the Coffee Market)

The New York “C” market has risen above $2.00 for the first time since 1997, and that’s something worth commemorating here at Sweet Maria’s. We started in late 1997, and I remember that market well, and the long, slow, dramatic, depressing slide from that 1997 high down into the dark pit of the Coffee Crisis, which averaged around .50 cents. The driving forces in this great market instability now is different than previous peaks and valleys. Outside speculators who benefit from the risks of price fluctuations are in the driver’s seat, and actual coffee buyers are just the passengers these days. There’s talk of global shortages of coffee, that Colombia is not meeting it’s projected targets and Brazil is drinking more of their own coffee than ever before. Those real supply factors certainly have some fundamental impact. But the influence of pure speculation, and those seeking better place for money based on currency movements, is huge.

The rather comical thing is that people who buy coffee are clueless. I am clueless, but I am not referring to myself here; we’re insignificantly small and we don’t play the market either. I am talking about bigger companies who fix their contracts by buying futures, and coffee importers, traders, those types. Well, they don’t know either. Knowing something about coffee only gets you so far in a game where you might be moving pieces around the board and they might look like coffee, but it is the stack of cash in the players hands that is what it’s all about.

And what’s so bad about a $2.00+ coffee market. In some ways it is good. Incentive will be there for growers to plant more, and farm level prices are going to be higher … for now. But it is also a supreme disincentive to quality practices on all levels. 1.80 parchment price for coffee would motivate small producers to harvest with care, process well, and remove defects by hand. If the local buyer who cares naught about these things can now pay 1.80, why do the extra work? So, of course, we pay more to motivate and receive quality parchment coffee. Fine. Except this: we pay more because we care about coffee; that local buyer pays more because the warehouse in the capital needs coffee, because they have contracts at good prices, contracts that are pinned to the New York “C”, and will be replaced by new contracts that might be .30 cents more, or .30 cents less next time, or might go into free-fall. And the shockwave from those market fluctuations will reverberate back to the farmer in three ticks of the clock.

When we talk about Farm Gate coffee pricing (our version of Direct Trade) that has nothing to do with the global coffee prices in New York, I guess there is a perception we are going back to a pre-market agrarian hand-shake-over-the-fence deal. And in a lot of ways that image has been quite true for the 3 years we have had “Farm Gate” at SM. But, as I am pointing out here, we have to compete against the C, and we have to pay more to get quality coffee. We are, in many ways, as beholden to the C market as someone buying spot coffee based on the daily price. I think the difference is that if, and when, the bottom falls out of this coffee market, the farmer selling good quality parchment that ends up at SM won’t be getting a punch in the gut. And that fact is, our customers aren’t really going to see much change in pricing because we have already been paying far more … In Colombia for example we have been paying a high differential based on quality against a very competitive local market price for a long time. We haven’t sold a Colombia coffee for $5/lb at SM for years; they are spendy, more like $6-$6.50. They are also amazing quality. So that’s not going to be impacted much in the near future.

And I imagine when speculators find something more exciting to do with their money, the coffee market will become more stable. At whatever price level, stable is good for everyone …farmer and buyer.

(Here’s a pretty good description of some of the supply factors affecting the C market lately).

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