4 COFFEE WORLD No single reason for price spike
A number of articles in this issue of C&CI reflect on the cur- rent high price of green coffee, the underlying causes of high prices, and the effect that this is having on the industry. When I took over as Editor of the magazine the ‘coffee cri-
sis’ was devastating the industry. Historically low prices were the big issue facing producers. Now we have the exact oppo- site situation, but as producers highlight in Marvin Perez's article about coffee prices, farmers are still paying off the debts they incurred during the crisis. Another contributing factor in the current crisis is the production capacity that was lost during the crisis, and the neglect that many coffee farms suffered as a result. Even with historically high prices it seems, most farmers are - at least for the time being - resisting the urge to plant more coffee. The coffee crisis may be long gone, but in the intervening years the cost of fertilizer rose
significantly; the oil price, and hence the cost of transporting coffee and of many products derived from oil, has peaked, fallen, and then risen steeply again. In many producing coun- tries labour costs have risen steeply, and continue to increase, and in many of the same countries working the land is no longer seen as an attractive way to make a living. Much has also happened to currencies and exchange rates against the Dollar in pro-
ducing countries, so that even though prices are high now, producers are not gaining the full benefit. Factor in serious problems in leading producers such as Colombia and the growing effect of global warming and changes in patterns of precipitation and you have a cocktail of major problems. It was interesting therefore to hear a number of very well known figures in the coffee
industry place the blame for high prices solely on the shoulders of speculators. Addressing the National Coffee Association (NCA) conference in New Orleans in March, where he received a Lifetime Achievement Award, Howard Schulz, Chief Executive Officer at Starbucks blamed speculators for pushing coffee prices upwards. "Producers tell me there is no problem with supply and demand," Mr Schulz told del-
egates. "I think it’s artificial. I think financial speculation has really stepped into the mar- ket," he said, noting that in his view, coffee drinkers would not "respond positively" to higher prices. Mr Schulz told delegates at the NCA’s centennial conference that "industry will suffer"
as a result of high prices. "History has shown us that consumption will probably drop as a result," he said. Mr Schulz said he could see "no substantive reason" to offer cus- tomers why the cost of a cup of coffee was going up. At about the same time, another extremely well known figure on the other side of the
Atlantic, Andrea Illy, Chief Executive Officer at Illycafe, made very similar remarks. Coffee in New York is as much as 50 per cent overvalued, said Mr Illy, because specu- lators have driven up futures prices, helping inflate a global commodities ‘bubble.’ In his view, what he called a more "reasonable" price for coffee would be US$1.80-$2.20 a pound. Should production increase and stocks rebound, the price could fall rapidly to US$1.50 a pound he said. "Coffee is trapped in the middle of a huge commodities speculation," Mr Illy was
reported to have said. "We are in a bubble for all commodities, and the bubble will burst. What worries me most is this resulting in an explosion in production," Mr Illy told Reuters, "as happened in the last big rise in coffee in 1998. Three years later the world was flooded with coffee and that led to lower prices and a crisis in coffee." Mr Illy said the inflated price of coffee created problems for roasters, who have
struggled to obtain financing for the much larger amount of working capital they now need as a result, and said concluding sales with retailers was now more difficult. Coffee traders C&CI has discussed the issue with recently also say that financing has become an issue. Mr Illy reportedly also said that he was in favour of increased market regula- tion in order to limit speculation-driven price spikes. For roasters, of course, high prices are a huge problem. One fear being expressed is
that consumers will be turned off their ‘cup of Joe’ by high prices, or that strategies roasters adopt to manage high prices will have the same effect. As Jonathan White at White Coffee told C&CI (see Profile in this issue), one of his biggest fears is that roast- ers will modify blends – for which read ‘use more Robusta’ – and turn people off cof- fee. If this happens, years of work by organisations such as the NCA that has helped boost consumption will begin to be undone. Interestingly, as also highlighted in this issue, top quality Robusta actually has a great deal more to offer the industry than is realised currently. The truth of the matter is that high prices are the result of a number of factors.
Speculation in the coffee market – and in cocoa – is something the industry needs to adjust to, but equally, as seasoned observers of the industry such as Judy Ganes- Chase have been pointing out for years, there are significant structural issues. These include historically low levels of stocks held in consuming countries, the (ongoing) effects of the last price crash, exchange rates, labour costs and higher prices for inputs such as fertilizers, not forgetting the steady rate of increase in consumption in the ‘good years.’ Taken together, factors such as these invite speculation.
BRAZIL
Biodiversity initiative supports Brazilian coffee farmers
USAID, Green Mountain Coffee and Fair Trade USA have announced plans to promote biodiversity, conservation, and environmental education among Brazil’s coffee farmers
The US Agency for International Development (USAID), Green Mountain Coffee, and Fair Trade USA have announced details of a new partnership to promote biodiversity, conservation, and environmental education among Brazil’s coffee growing com- munities. The new initiative, called the Sustainable Sourcing Partnership
Project, aims to increase producer organisations’ understanding of, and compliance with, Fair Trade environmental standards and Brazilian environmental law. The project is designed to support Fair Trade certification for
new producer organisations and increase the amount of land under enhanced environmental protection through this certifica- tion. The project will also support producer organisations inter- ested in organic production and promote marketplace access for their products. "USAID believes that this partnership will make an important
contribution towards environmental conservation and effective natural resources management by working closely with small coffee producers so that they may benefit from economic oppor- tunities made available by utilising sound environmental prac- tices," said Denny Robertson, USAID Mission Director to Brazil. The project will build on the success of previous programmes
from USAID and Fair Trade USA to enable participating farmers to continue to make high-volume sales whilst diversifying their client bases with higher-value sales to new sustainability and quality oriented customers such as Green Mountain Coffee. Green Mountain Coffee and USAID both contributed
US$200,000 to fund the initiative, and Fair Trade USA is spear- heading the programme and providing technical and staff expertise.
UK Coffee Kids closes UK office
Charity Coffee Kids has closed its UK offices. The charity said that it had to make a tough decision in the current economic climate. "Because of this we have decided to close the UK Charity and
operate with one office," said Coffee Kids. "In order to ensure that sufficient funds continue to go to projects,
Coffee Kids has been forced to make the difficult decision of centralis- ing our efforts through the US organisation."
May 2011 C&CI
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