Could increased pricing be good news?

Could increased pricing be good news?

In February, the price of green coffee futures contracts in New York — also known as the ‘C price’  — reached more than $2.50 per pound, its highest level in over a decade. The C price is the benchmark for the vast majority of green coffee prices worldwide, and in just two years, it has increased by two and a half times. 


This enormous price hike comes at a time when the cost of almost everything is increasing, from the gas used to roast the coffee, to the cost of the bags that we put it in — and yet, the price increase may be grounds for cautious celebration. If the price going up means that coffee farmers can earn a fair living for their coffee, we are fully on board, and we trust that our customers will be, too. 


Unfortunately, things are rarely that simple. The price of coffee has been unsustainably low for years, well below the cost of production in many countries. The increase now only comes after several difficult years for coffee producers, and the cost of inputs like oil and fertiliser is now going up even faster than the price farmers get for their coffee. In this post we will explore why prices have gone up, and whether this is good news for the farmers who produce our coffee.

 

What is the C price and why is it so volatile?

Stock chart by Nicholas Cappello on Unsplash

Stock Charts during a live trading session; image by Nicholas Cappello via Unsplash

The C price is the benchmark price for Arabica futures contracts on the ICE exchange. Futures contracts are agreements to deliver a container-load of coffee at a specified date in the future. A buyer can fix the price they pay for green coffee next year, for example, by buying futures contracts for the coffee they need a year in advance.

The price of coffee fluctuates wildly — the C market is even more volatile than the stock market. Coffee producers and buyers can use futures contracts to protect themselves against changes in the coffee price. Most futures contracts, however, are traded by speculators, who make money by betting on future changes in the coffee price.

In 2017, 2.7 billion bags’ worth of coffee contracts were traded on the New York market alone — more than 16 times the world’s annual coffee production. The C price therefore depends on supply and demand in the coffee industry — but perhaps even more so on the actions of speculators, which are linked to other markets such as currency exchanges or the price of oil.

 

Why are prices going up?

Three years ago, the C price sat at historic lows of less than a dollar per pound, forcing farmers in many countries to sell at below the cost of production. Prices only began to recover after a severe drought in Brazil hit coffee production in 2021, followed by harsh frosts later the same year. The frosts damaged trees and killed seedlings, and are expected to affect production for years to come. With less coffee available, prices started to rise. 

Because Brazil is by far the world’s largest coffee producer, what happens there has a strong influence on world coffee prices — but producers in other countries have suffered too, with drought in Vietnam and instability in Ethiopia and South America affecting global production.

Coffee prices in the last decade

The C price is the benchmark for most coffee prices worldwide. Since 2021, the C price has more than doubled; Coffee Prices data by macrotrends


Global trade has also been hit by a shortage of containers, and the ongoing effects of the coronavirus pandemic, meaning the costs of shipping have dramatically increased. The cost of bringing a single container from Brazil to Le Havre, for example, more than quadrupled from €1,450 in 2021 to €6,400 this year. 

There are some signs that the coffee price has peaked, at least for now: in March the monthly average price slipped slightly for the first time in a year and a half, and the global reserves of coffee held in warehouses began to recover after a year of steady decline. 

However, following the Russian invasion of Ukraine, the price of oil and fertilisers have skyrocketed. If farmers can’t afford fertilisers, not only will their yields drop, but they also run a bigger risk of outbreaks of disease such as leaf rust, which thrives when plants are stressed.

 

Are price rises good news for producers?

Our CEO Kris Schackman meets our coffee producer Julius Muriuki in Kenya.

Our CEO Kris Schackman meets our coffee partner Julius Muriuki at the raised drying beds in Kiringaya region of Kenya.

After struggling with low prices for so long, the price increase should be good news for coffee growers — but not all producers will benefit equally.
The price increase is a direct result of lowered production, with some growers suffering devastating losses. For these farmers, increased prices for a year or two will barely put a dent in the cost of replanting their fields, and coffee price increases rarely last for long. When prices rise, farmers with the means to do so respond by planting more. When production recovers, prices will inevitably fall again.

Producers with pre-existing contracts may be bound to sell their coffee at low prices. When the price rise is this extreme, some growers may choose to break their contracts and suffer the consequences. In Colombia last year, according to one report, producers may have defaulted on as much as 10% of the total crop

The cost of production is also going up, eating into farmers’ margins. Years of low prices have driven people out of rural areas in many coffee producing countries, forcing them to move to cities or emigrate in search of better opportunities. With a shortage of workers to pick the coffee, labour costs at the farm are rapidly increasing.

 

What’s the effect for consumers?

Customer buying a bag of coffee

The C market has reached this price several times in the past — but there are some factors that make it more challenging this time around. The price increase comes at a time when the costs are increasing for the whole supply chain. Inputs, labour, and shipping are becoming more expensive for growers, traders, and coffee roasters alike.

The good news for consumers is that the cost of coffee beans is a relatively small part of the cost of a cup of coffee — so while all costs are increasing, the average cost of a cup may not increase as much as the cost of green coffee has. On the other hand, the cost of roasted beans is directly linked to the price of the green coffee. As this year’s new harvests reach the shelves, you will see some coffees with higher prices, which reflect the higher prices paid for the green coffee. 

 

How do we navigate volatile coffee prices?

Our partners in Ethiopia on a coffee farm

Our partners in Ethiopia 

At Five Elephant, we have not used contracts to tie farmers into low prices from previous years. Instead, we communicate with our producer partners directly to establish fair prices for each crop. Price rises can no doubt put a strain on direct trade relationships, but we firmly believe that coffee should be more expensive, to fairly reward producers for hand-picking and processing the coffees that we love drinking.

 

This approach presents a challenge in the face of rapidly increasing prices.
As a roaster, should we increase our retail prices accordingly, and risk losing customers? Or should we buy more coffee at lower grades in order to limit price increases?

 

Our approach has been two-fold. For the high-end specialty coffees that we source, we have committed to continue working with the coffees that our producer partners have to offer. The prices for specialty grade coffees are still partially linked to the C price, which means some price rises are inevitable in order for us to maintain our quality standards. The good news is that prices for higher-end specialty coffee tend to fluctuate less than those for commodity coffees. This also protects farmers from a volatile market in times when prices are low.

As well as the high-end specialty coffee that we are known for, we also source some more commercial coffees, which we roast for our white label partners. We buy most of this coffee directly from the producers: a farm in Brazil that uses mechanisation and automation to keep the production costs low. This coffee is not sold under the Five Elephant brand — instead we source and roast it according to our partners’ specifications and price requirements for them to use in their own business. For these partners, keeping to a fixed price point means that the coffee we source for them must contain a higher proportion of commercial grade coffees.

As a small scale specialty coffee roaster, the price of our coffee is not only dictated by the C market. The practicalities of operating during the pandemic have tripled the cost of roasting each batch of coffee. As pandemic restrictions end and the volume of coffee we roast starts to recover, we will be able to become more efficient again, but we anticipate this process taking some years. We held back on increasing prices during the pandemic years, as we couldn’t be sure how long the situation would last and what the long-term effects would be. With the C market also increasing, this is no longer an option. 

The recent cost of living increases also have a significant — and permanent — effect on our costs. Over the past two years, we’ve increased the salaries of roastery staff by 20 to 30% in order to keep pace with the cost of living, and the minimum wage is slated to increase by 25% over the course of this year. 

 

What happens if the C market falls again?

Since the C price is not only affected by supply and demand, a fall in the C price doesn’t necessarily mean that the costs have gone down for farmers. In fact, the opposite is usually true, and drops in the C price can cause a lot of hardship, especially for small producers. 

Over the last five years, while the C market has been low, we kept the prices we paid to our partners stable, and didn’t insist on lowering prices to match the market. Some prices did decrease, but only as a result of close consultation with the producers we work with. We try to stabilise the fluctuations in the coffee price as much as possible — not to ride them like waves. 

 

Our hope is that higher prices paid to producers can result in a higher profit for them over their cost of production. If our market can adjust to this “new normal” we are on a good path towards our mission to make coffee more sustainable — and for you, our customers, we hope that this increase could be palatable. 

Active organic coffee farm of our partner FAF in Brazil

 Active Organic Trial Area, Fazenda Ambiental Fortaleza, Brazil

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