The Cost of Coffee – Prices and Planning for Small Coffee Roasters

Prices and Planning for Small Coffee Roasters
Posted in: Strategy
By Mike Ferguson
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The Cost of Coffee – Prices and Planning for Small Coffee Roasters

Throughout 2019, the New York floor price per pound for coffee trading, the C-Market, struggled to stay above the $1.00 waterline, sinking more than swimming. There is a chance (the chance depending on the company you keep) that during this period of low prices you heard some coffee wag utter the following time honored bit of economic wit and wisdom: “The cure for low prices is low prices,” followed by everyone nodding thoughtfully as they tried to remember what that means, exactly.

Over the last eight months, prices have been trending steadily upward and as I write this the C-Market has been hanging out—somewhat erratically—in the neighborhood of $1.50. (Prices would move past 2.00 several times by the time we mentioned this blog post in an email). Although this does not translate into high prices in an objective sense, it does mean high prices in relative terms for coffee roasters who have become acclimated to buying green coffee over the last two years. Coffee roasters who have been buying green coffee for less than three years have never seen the C-Market above $1.20 and nobody has seen the prices we are currently experiencing since 2015. It can be jolting. And no doubt, someone somewhere has already said it: “The cure for high prices is high prices.”

The fact that prices are not high, that they are just higher than what some newish roasters might be used to, is important to grasp. Compared to 2012 or 2014, the prices we’ve seen over the last few months (prior to the around 2.00 spikes) are normal. Compared to 2011, they’re low!

Despite being highly differentiated in terms of quality, specialty coffee is still an agricultural product with fundamental ties to commodity markets for price discovery. Decades of lamentations over the inequity of the C-Market for farmers have not produced any tectonic-level shifts on the horizon of this reality. While many of us look for and actively support change, for the foreseeable future the largest expense for coffee roasters, green coffee purchasing, will remain vulnerable to price volatility and if Brazil sneezes, the coffee world will still catch a cold.

These are the reality checks of green coffee buying, imbedded in the industry for generations. For small coffee roasters who do not have the option of formally hedging against the ebb and flow of market forces, sudden jumps in price can be bruising unless they learn to expect the unexpected and plan accordingly.

We know the costs of doing business will rise and that a great many of these increases are more or less predictable. We can budget against them with a fair degree of accuracy. This can even be true for some coffees that trade with no overt connection to the C-Market. But when it comes to most coffee, what we know is that prices will go up and down … when and by how much is a classic known unknown. Nevertheless, as with budgeting for other costs of doing business, history can help us plan or, at the very least, contribute to passive management of expectations.

First, it can be valuable to gain some supply chain perspective when it comes to the history of prices if for no other reason than one does not hope for nor want to see the floor price for coffee drop below the average cost of production, which it has easily done for the majority of trading days over the last 36 months, at least for Latin America.[1]

For roasters, looking beyond the last 10 to 15 years for ideas about pricing can be tricky. From July 11, 2000 to December 14, 2004, the C-Market did not go above $1.00 once over 1,093 days of trading, bottoming out at 42 cents on October 22, 2001. For nearly 200 days coffee traded below 50 cents, far below the average cost of production at the time. Despite being prolonged to the point that farmers started to abandon their farms, this period that is still known as “the” coffee crisis, represents a relative anomaly and not helpful for planning.

Suffice to say and remember, as inconvenient as upturns in price can be for coffee roasters, downturns can debilitate farmers.

The prices you paid for green coffee last month, last quarter, or even last year are almost entirely irrelevant for planning purposes. If you cast a wider net you can capture more market fluctuation.  For example, the past 10 year average for the C-Market is $1.40. This is a good planning number. Even if we exclude the upward movement in prices over the last eight months, the 10 year average is still $1.38. In any case, the 10 year average can serve as your C-Market budgeting number, your “phantom C,” you might say. This is the number to which you add your differentials for creating a green buying budget for coffees that are bought and sold on a differential basis. From this point, the level of detail is up to you, your temperament, and perhaps to a greater extent, your record keeping.

You can download an Excel sheet of C-Market prices going back to 1990 for free at the International Coffee Association (ICO) website. If you dig around the internet you can find daily prices going back to the 1970’s. I like looking at daily pricing but I’m a nerd. The monthly averages provided by the ICO will work just fine.

Go through your coffee purchasing history, subtract the historic C-Market prices from the per pound price you paid for differential coffees at the correlating time to establish the budgeting differential. Calculate averages for each origin and/or quality grade within each origin, then add those to whatever the 10 year C-Market average is at the time you’re creating a green buying budget.

(Caveat: If the C-Market average for the previous six months is substantially higher than the 10 year average, marking a sudden and significant price increase that could possibly be sustained through a crop year purchasing cycle, use that average instead. For example, prices going from $1.84 in November 1976 to $3.35 in April of 1977 due to a black frost in Brazil.)

So, if the average differential you paid historically for Guatemala is $2.33, you would budget $3.73 per pound for your Guatemala coffee. If you don’t yet have much of a purchase history, or if you want to budget for coffees you’ve never purchased, log into your Olam Specialty Coffee account to view coffee prices. Subtract the C-Market price at the top of the page from the per pound price of several coffees from any given origin, separated by quality grade if relevant, and average the difference.

This process can be more precise, determining separate budget numbers for multiple coffees from one origin, separated by grade or processing method; or less precise, an average across all green coffee purchased on a differential basis.

The critical discipline with this strategy is, when green coffee actually costs less than your budget, you retain the surplus in your green coffee purchasing “account” for a rainy day, i.e. when prices exceed your budget. This process of building up a sustained budget buffer can be thought of as paying a sort of “risk premium.” And, as with any budget, you need to recalculate annually.

There are other ways to approach price flucuation and this is  not a perfect system. No budgeting scheme is and, of course, you should be intimate with all your costs, not just green coffee, and know when to raise prices. But this approach is better than nursing an addiction to low prices. The process also serves as an ongoing reminder that we’re in the coffee business, where planning for the unexpected is expected.

  

 

 

[1] Average of $1.28 using Peru, Colombia, Guatemala, and El Salvador in 2018. Cost of Production varies greatly by country, farm size, and even crop year. Any average can only be considered an indicator. From July 12, 2018 and July 12, 2021 coffee traded below $1.28 on 86% of the days open for trading.

3 months ago