“A lot of farms are being abandoned,” says Sonia Vásquez, an
organic coffee grower on the slopes of San José, south-west Honduras. “A lot of
people are migrating — many can no longer make ends meet.”
Over the past six years Ms Vásquez, 46, has seen her crop
devastated by disease — a coffee tree fungus that has ravaged parts of Latin
America. Now her business has been wrecked by tumbling global prices — the
value of her crop has shrunk by almost a third over the past year, falling well
below break even.
Yet this should be a boom time for growers like Ms Vásquez
based in the “coffee belt”, the region over the equator between the Tropics of
Cancer and Capricorn. Consumers are drinking more — from drip coffees to
vanilla lattes to cold brews — than ever before, but Ms Vásquez and other
farmers from Peru to Papua New Guinea and Ethiopia to Ecuador are struggling.
Prices of arabica beans — 60 per cent of the market — have fallen to a near
14-year low of around 90 cents a pound on the Intercontinental Exchange.
The value of the global coffee industry has almost doubled
in the past decade to $90bn, according to Euromonitor. Despite fears that
climate change could reduce supply in the medium to long term
a combination of better than expected harvests with more
efficient producers and currency markets has conspired to keep wholesale prices
low.
Both Brazil and Honduras last year reported record coffee
output, while Colombia has been producing its highest levels since the 1990s.
But demand has not kept pace and there is a massive oversupply in the market.
The true cost of your £2.50 coffee
Breakdown: 35% Shop costs/rent; 25% Staff costs; 15% Tax plus
additional costs; 10% Profit; 7% Cups, napkins, stirrers; 4% Milk; 4% Coffee
Price of just the coffee: 10p
“This has surpassed an economic crisis. People are moving
away [from the farms]. They are absolutely heartbroken,” says Roberto Vélez,
chief executive of the National Federation of Coffee Growers of Colombia.
“Consumers don’t know what is really going on.”
Affected farmers in Guatemala and Honduras have been joining
the migrant caravans to the US, while some in Peru and Colombia are turning to
coca, the source of cocaine, say traders. And while in the short term there may
be plenty of beans, the exodus from coffee growing, especially that of the
higher grade product, has fuelled worries among buyers about the sustainability
of future supplies.
“If the situation continues, I’m not sure where we are going
to be in five years’ time,” says Matt McDonald, procurement manager at
Cafédirect, a UK coffee importer whose main suppliers include Peruvian
co-operatives. “It’s a detrimental cycle because [the growers] cannot afford
enough fertiliser, the quality reduces, the yield reduces. And it gets worse
each year.”
Some multinationals are already acting to secure supplies by
providing farmers and co-operatives with technical support and tree saplings.
In September Starbucks committed $20m to smallholder farmers in Nicaragua,
Guatemala, Mexico and El Salvador.
In Honduras, coffee farms are being abandoned as farmers can
no longer make ends meet © Bloomberg Nestlé, the world’s largest coffee buyer
which invests about SFr68m ($67m) a year on technical support programmes for
farmers, acknowledges that the price situation is unsustainable. But it adds
that addressing the issue of farmers’ income is beyond the scope of any one
company, and that it is “engaging with the International Coffee Organization”
to try and find some solutions.
Coffee is largely divided into robusta, the hardy lower
quality bean which is turned into instant coffee or blended into espressos to
add a bitter kick, and arabica, the smooth mild tasting higher quality bean.
Arabica is graded from high — the beans grown at altitude which are wet
processed — to lesser quality, farmed at lower altitudes and dried in the sun.
At the root of the price problem is the increased production
of low-grade arabica coffee, say traders, which is dragging the whole market
lower. “There is too much commodity grade coffee,” says Stephen Hurst at
Mercanta, a UK-based trader focused on the speciality end of the market.
This flood of beans has driven the arabica futures price —
traded on the ICE and known as the New York “C” — lower. Coffee prices are
bought and sold using the New York price as a reference, with higher grades
traded with an added premium and lower grades priced at a discount. The current
benchmark has meant that even with an added premium, many producers are not
able to break even. The New York C has averaged about $1.20 a pound over the
past three years. But over the same period the cost of producing, processing
and transporting the beans has, for some growers, been more than $1.50 a pound.
This has lead producers to seek a new way to price their
coffee and bypass the New York C as a benchmark for the industry. Some are
dealing directly with growers or co-operatives to negotiate a price based on
their costs and profits.
Last year Brazil reported record coffee output, yet demand
has not kept pace and there is a massive oversupply in the market © Bloomberg
Mr Vélez says Colombian growers are desperate to untangle themselves from the
New York market, because it does not reflect the true value of the high grade
coffees produced across Latin America. He adds: “Why do I have to be tied to a
market which doesn’t work?”
Opponents argue the situation has been made worse by the
rise of digital trading, where algorithms — some of them programmed to act on
forecasts of Brazilian output — execute trades in anticipation of the market
rising or falling, exacerbating price volatility.
Like many agriculture commodities, the coffee market is
prone to “boom and bust” cycles where high prices trigger the planting of more
trees and better management, resulting in improved production. In the case of
coffee, the cycles are accentuated as it is not an annual crop and once a tree
is planted it will continue producing although yields and quality tend to drop.
But when the trees first mature — up to four years after planting — the new
output can weigh on prices. And those lower prices can then lead to poorer
quality beans and less output.
In this environment Brazil has come to dominate the market.
Not only is it the largest producer and exporter of coffee, accounting for 28
per cent of the world’s coffee trade last year, its farmers can grow their
beans at low cost, with a break-even point of below 90 cents per pound. For
many of its growers, harvesting is mechanised, with mass production allowing
beans to be processed in much simpler ways compared with those in Central
America and Colombia.
The country produced a record 62m 60kg bags last year, while
a weak currency offered local producers and exporters higher returns on beans
sold overseas. And although output is predicted to take a breather this year,
it could produce another large surplus in 2020. “Other producers may see falls
in production,” says Carlos Mera, senior analyst at Rabobank. “But it’s
unlikely to be enough to compensate for the likely increase in Brazil.”
Yet even for low-cost farmers in Brazil, current prices are
starting to hit profits. José Marcos Magalhães, president of Minasul, a large
coffee co-operative in Varginha in the south of Minas Gerais which exports to
17 countries, says many of its 8,000 members are smallholders, whose margins
are being squeezed. “If this price range continues, there will be
unemployment,” he says.
Lúcio de Araújo Días, commercial head at Cooxupé, Brazil’s
regional co-operative and its largest coffee exporter, is adamant about what is
to blame for the relentless drop in prices: financial speculation. Over the
past five to six years, these financial players have taken their cue from the
largest producer and exporter, Brazil, and since 2017 have held record “short”
positions, betting on a fall in prices, at a time when non-Brazilian producers
are already struggling to cover their costs.
“The global financial market is selling coffee thinking it
can go on forever,” says Mr Araújo Días. “The funds are selling endlessly,
every day they sell.”
Ever since the New York coffee exchange opened in the 1880s,
speculators have been blamed for manipulating prices. Apart from buyers and
sellers of physical coffee locking in their prices using futures, participants
such as hedge funds also place bets on rising or falling coffee prices.
However, the level of speculation over the past year has led
to questions from buyers and sellers, who use it to hedge their future
purchases and sales, about the efficacy of the market.
“The speculators’ short positions are massive,” says Steve
Pollard, coffee analyst at London-based brokers Marex Spectron. “But while they
exaggerate the moves, they don’t determine the overall direction of the
market.”
Although the growers’ stories are often used in the
marketing of individual coffee brands, consumers are largely oblivious to the
current plight of the farmers, assuming that the increased price they are
paying for their morning brew is — at least partly — passed on to the producer.
But in an everyday £2.50 brew, the coffee itself accounts
for about 4 per cent, or around 10p — rent, labour and tax taking a much larger
portion of the cost.
“The cost of coffee is really marginal [for the retailer],”
says Jeffrey Young, chief executive of consultants Allegra Strategies. “Even if
your coffee beans go down 30 per cent, the cost of cups and workers has gone
up, the rent has probably gone up and everything else has gone up.”
Paying farmers a fair return for their beans has been the
focus for some progressive roasters and traders in an attempt to
“decommoditise” coffee.
Ken Lander experienced the pain of the grower first hand
when he quit his legal career in the US to live in San Rafael de Abangares, in
north-west Costa Rica. He bought a coffee farm almost as a hobby, intending to
live off his US real estate sales, but lost all his assets in the 2008
financial crisis and was forced to start selling his beans.
He quickly realised that the batch of coffee he had just
sold — which was roasted in the US — was generating about $30,000 in retail
sales of which he received just $600.
The 52-year old teamed up with other growers and
entrepreneur Michael Jones to start a coffee importing business in 2011 in
Atlanta. Thrive Farmers, which buys from about 1,000 farmers across five
countries, has a revenue sharing model designed to give 50 to 75 per cent of
the revenue from the beans’ retail value to growers.
“How do you create a gross margin for a farmer that actually
incentivises them to want to stay in the business?” asks Mr Lander, who is now
Thrive’s chief sustainability officer while still growing his own coffee. “Our
farmers have made three times more profits than their next best offer in the
marketplace.”
Back in Honduras, Jairo Murillo, who grows coffee between
the country’s capital Tegucigalpa and La Paz, needs to earn a living for his
family. “We can’t survive,” says the 27-year old who has a 1.7 acre farm. “Lots
of people have left because of this. I’m thinking about leaving, or I’ll sell
if I can find a buyer. There’s no other option.”
Mr Lander says that like Thrive, many coffee companies from
large to small have their own programmes to help the grower, but acknowledges
that something more structural across the industry needs to be put in place.
“If we don’t, as a coffee industry, come to realise that a
farmer cannot continue to grow coffee and make almost no margin or a negative
margin, then we’re going to have issues,” he says. “You don’t have to be an
economist to figure that out. It’s not that hard.”
High-end beans: ‘Specialist’ market faces future supply line
fears
The number of farmers who can no longer afford to stay in the
industry is a particular concern for buyers of high-grade beans who rely on
smallholders to produce unique flavours.
The so-called “specialty coffee” sector often relies on the
farmers’ personal stories to market their brands. The concern is that the
current market gyrations will drive out all but the most efficient producers —
those in Brazil for arabica beans and Vietnam for robusta. “Do we want a world
where all the arabica is only available from Brazil?” asks one leading coffee
company executive.
Speciality coffee — from the artisanal drip in a café to the
single-serve pod in a home machine — is going from strength to strength.
Loosely defined as coffee above 80 on the Specialty Coffee Association’s tasting
scale of up to 100, it now accounts for more than half of the coffee consumed in
the US. And many executives now accept that the industry New York “C” pricing
benchmark no longer properly reflects the value of speciality beans. “Specialty
and commodity coffee need different kinds of price discovery,” says Professor
Peter Roberts at Emory University’s Goizueta business school in Atlanta,
Georgia.
One of the issues has been the lack of information as the
details of price agreements are often closely guarded. Some high-end roasters
and traders negotiate directly with growers and cooperatives for high-grade
coffee, paying the farmer based on costs as well as the retail price,
In 2014 Prof Roberts started Transparent Trade Coffee, a
website that offers price information. And together with coffee consultant Chad
Trewick, he has launched a speciality price guide based on data supplied by 21
importers, exporters and roasters in 10 different countries. The latest data
show that in 2017-18, prices ranged from about $1.55 a pound to $9.05 with the
median at $3, compared with a market average of about $1.
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