Green Coffee Price Increases

In Coffee 101 // on March 9th, 2011 // by // No comment

By now, everyone on the planet who grows, buys, roasts, or drinks coffee on a regular basis knows that prices for green coffee are going rapidly and steadily up. A lot of people will say the increasing prices are good because the market’s been on the rebound since the late ‘90’s, early 2000’s when a price bubble burst. Farmers were devastated when their crops were suddenly and drastically devalued. So, most of us know that we’re experiencing a “correction” in the market. The issue for the last year or so is that no one knows if we’re sitting on top of another bubble, or not.

According to the International Coffee Organization, an intergovernmental organization who meticulously collects and analyzes data on every aspect of the global coffee market, we’ve seen a nearly $.93/lb. increase in the composite price of green coffee between February ’10 and February ’11. That’s a 75% increase in one year. Luckily, Heine Brothers’ Coffee isn’t looking at increases quite that high. But, we are going to see a significant jump from 2010 prices.

The cost of green coffee, like the cost of any agricultural product, is an incredibly complicated thing to understand. It should be as easy as saying, “Supply and demand, duh.” Well, it ain’t. On the demand side… well that is kind of an easy one actually; people all over the world are demanding lots more coffee. It’s really the supply side that makes things so interesting.

Just like folks who grow corn and soy, coffee farmers are at the mercy of the weather. Torrential rains and mudslides that ravaged Central and South America in ’09, ‘10 obstructed production (as well as access to potable water and roads) in the affected growing countries, thereby causing a spike in prices. According to a blog post at Royal Coffee, unrelenting monsoons in Indonesia last fall have set production in that region back for 2011. Farmers know: It’s never ending.

Based on what I’ve gleaned from news stories and blog posts from other roasters, there are plenty of other (maybe surprising) factors in increasing prices. Development in the developing world, for instance, is putting a crunch on agriculture. Much like what happened in the US in the 20th century, urban sprawl is consuming agricultural lands, and younger generations are leaving farms to move to the city. Many people also cite dwindling coffee stocks in US warehouses. (Yes, the US has warehouses full of coffee, just like our strategic oil reserves*, only slightly more important.) Stocks in these warehouses were tapped in ’09 and ’10 due to the aforementioned supply crises, and haven’t been replenished. Even as production has begun to recover in the last year, producers are well aware of the record prices they could be getting. Because of this, some farmers are holding their stocks, betting that tomorrow’s price will be better than today’s.

Now that we’re aware of some of the factors in the pricing equation, the question for most of us is, “When will we hit the top?” Like I said earlier, the market has been climbing out of a deep hole for about 8 years or so. The problem is no one is sure how far it has to climb before reaching level ground. I’ve only come across one article suggesting we might be in the midst of another bubble. Most people, especially the folks at Coop Coffees who secure our contracts for us, think prices might come down a smidge, but long-term factors indicate we should all prepare to get comfortable with paying a little more for coffee well into the future.

Tune in next time when we discuss how high prices and volatility in the open market affects Heine Brothers’ Coffee/Cooperative Coffees green coffee contracts, green supply, and our long-term relationships with our growing partners. It involves coyotes and frank discussions with farmers about what they really need.

* Not purchased and maintained by the US gov’t. a la the oil reserves. At least, not that I know of.

Alec Risch is head roaster and warehouse manager for Heine Brothers’ Coffee.

References:
http://www.royalcoffee.com/mblog.asp
http://www.ico.org/index.asp
http://money.cnn.com/2010/09/10/markets/coffee_prices/index.htm
http://www.justcoffee.coop/node/13091
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