Ask Rob About Coffee Prices and the Future of Coffee
The following transcript is from a December 12, 2024, live stream. Covoya’s Trada Analyst, Liesa Collins, sat down to talk with our Managing Director, Rob Stephen, about the coffee market and the future of coffee. The transcript has been edited for length and clarity. On the day of this recording coffee closed in New York at $3.17. On the day this trascript was prepared for publication, February 10, coffee closed in New York at $4.29.
Lisa
So we have some questions for Rob that I think some people sent in and some things that are kind of relative to the times that we're seeing right now in coffee. Our first question is, who sets the c-price?
Rob
Yeah, that's a great question. And it's times like these that make me realize, most people don't think about the C-Market at all. They don't think that it exists. It's just, coffee enters this world in a bag and at a price. You only think about something like this when it goes haywire, which is sort of where we are right now. But the short answer to who sets the c-price is you do, you meaning everybody.
The C-Market price is an on the spot, real-time discovery of the price of coffee using supply and demand and people who are willing to buy and willing to sell at that price. The exchange is an exchange. It's like a marketplace where people come together to basically barter and ask, would I pay this much for coffee. And people say, I would sell it for this much. The people in the trade who ultimately sell to consumers know what they can sell it for. So really it is ultimately a discovery of the price that would be paid by a consumer for coffee and the price that a farmer would sell it for at the beginning and the end of the chain. There's a lot more to it and I think the subsequent questions will get to it, but at the end of the day the C-Market price is simply a reflection of global supply and demand and what everybody who's participating in the trade thinks coffee is worth.
Liesa
Why is the C-Market going up? What happened?
Rob
That's a long and involved answer, which I'll try to make as simple as possible, but for years the price of coffee has been very stable. It's fluctuated somewhere between roughly a little over $1.00 a pound to say $1.80 a pound. And there hadn't been a lot of changes in the balance between supply and demand. That has also created some space for specialty coffee to exist because specialty coffee lives in sort of a separate zone from that. If coffee is priced at this low level, specialty coffee is something that is more valuable, it's priced at a much higher level. This takes into account a couple of assumptions that are no longer true.
One is that there's roughly the same amount of coffee available every year or a growing amount of coffee every year and demand and supply are roughly in balance, there is roughly as much coffee in the world available as the world wants to drink. No longer true, which is the short answer to why the c-price has gone crazy. The c-price has gone crazy because there has been successive years of disappointing crop numbers from the top producers of coffee, especially Brazil, and demand for coffee has stayed the same or increased. So there is more need for coffee and there is not enough coffee.
We understand it from crop surveys and what we can see from export statistics and just the availability of coffee in consuming countries for roasters to buy. There is so much risk associated with selling coffee forward now that the price has just gone up. If you take the word coffee out of the conversation you could put in any product you want. If there's not enough and more people want it, the price is going to go up and that's what's happened.
If you look at the contract listings and the prices going forward into the future, you can see that the sentiment is that this is a problem that's going to persist for some time. It's not like this is a short-term problem and next month there'll be coffee. What the market is telling us is that there's pessimism on the amount of coffee that will be available in the long term.
That's the long and the short of it. There's not enough coffee. There's more people that want it. Coffee isn't a thing that people just give up when it gets more expensive. It's one of the biggest traded products in the world so the price has to rise.
Liesa
In your opinion, can we expect the same whiplash in C-Market prices that we've seen this week.
Rob
Yeah, whiplash is a good word and a substitute for volatility. It's not just the overall price, it's the changes, the rapid changes in the price that make people crazy. It's making traders crazy. It's making roasters crazy. It's making farmers crazy. It's making exporters crazy. It is very hard to handle a day where coffee trades in a 20 or 30 cent range from open to close when for years we traded in one or two cent ranges. That volatility makes it very hard to understand what's going to happen. You see the market take off in the middle of a day. You don't know if it will keep doing that or come back down. It paralyzes people. It makes it hard to make decisions and we're no exception to that.
But I think the thing to think about here is that volatility is an expression of the market saying, we don't know what's going on. You have some people coming into the market saying, I would pay more. You have some people coming into the market saying, no, that's too much. I would pay less. I would sell for more. I would sell for less. And it's all happening in real time. So imagine yourself in a very crowded room of people who have very different opinions about something very urgent. That's what the C-Market is right now. That volatility will continue until everyone starts to think the same way.
When everyone starts to think the same way, the difference in their opinions gets closer. Their opinions of what the price should be will get closer. And then we'll see that straighten out. So again, it's important if you're involved in this market as a buyer or a seller to think that you have two things to manage here. You have the overall price and you have the volatility. I continue to think that the overall price is under a lot of pressure. There's a lot of factors that are going to make the overall price continue to have more bullish pressure, meaning the price will go up, than bearish pressure where it will go down. But the volatility should resolve itself when everyone agrees on the same numbers. That's something that would be nice to see. This volatility is making everyone crazy. If it's making you crazy, you're paying attention. It's definitely making us crazy here in this office.
Liesa
I have kind of a compound question here. What's the state of our upcoming harvests if reporting is conflicting? How much are price increases just “finance bros” using coffee to hedge against currency fluctuations?
Rob
The volatility that we just talked about is largely being driven by the fact that the reporting is conflicting. So there are three major trade houses—we’re one of them—that publish coffee forecasts specifically about Brazil, but also about the rest of the coffee world. What has happened is all three of the trade houses have come out with reports that say the 2025 crop is going to be drastically reduced from the initial estimates. Some of the reports are very big reductions, some of them are much smaller reductions. There's also been independent analysis from various consultants and it's a fairly safe opinion to say that everyone's numbers are down. So there's no conspiracy in the data to, you know, to get coffee prices down. There's less coffee for sure.
If you sit in an office like ours, you talk to exporters and producers all day long, everyone will tell you that there was issues with the fixing of the fruit on the trees, in Brazil in particular, and that has reduced the crop. We’re also looking at crop reductions in some other important countries.
In addition, and this often doesn't get a lot of attention in times like this, we have a full-blown logistics crisis coming, not just from the Red Sea, but container availability, throughout the Americas. Coffee that would once take 10 days to get here is taking two months, sometimes three months. You have currency issues all over the place. You have the results of various elections that throw trade policy into question, including in the U.S. So, yeah, there's a lot of uncertainty.
And there's a lot of pessimism. There's not a lot of optimistic news so the market reflects that. If you look at where coffee is supposed to be after it's harvested and processed, the market feels good when it's living where it's going to be roasted, right? The coffee needs to be there so that it can be roasted. If it's still at origin, it can't be roasted.
Farmers hold onto coffee, as they should because prices are rising and you don't want to sell until you feel like you have a maximum price, so coffee is not where it's supposed to be and because it's not where it's supposed to be the market only has one tool to fix that which is to raise prices until people will ship coffee to where it's supposed to be and if you look at consuming country warehouses, they're largely empty.
As for the “finance bros,” are there speculators in the market? Absolutely. There are always speculators in the market. Don't be surprised though that some of the finance bros are not finance bros at all, they're your retirement fund. There's a lot of index funds that are just managed money. Very boring, very, you know, fidelity kind of stuff where people are just putting money into funds that broadly invest in commodities and they come in and out of coffee all the time. They actually do provide liquidity for people who are in the market. It gives you a chance to buy or sell from a willing buyer or seller and so it's not all bad. But if the question is, are the prices that we're seeing now the result of market manipulation by speculators I would give an emphatic no to that. I would say it's completely fundamentally driven by supply and demand
Liesa
Okay, so if I am a small to medium-sized roaster should I look to the larger roasters as a guide to remain competitive in pricing?
Rob
I love this question. So our producer Mike has a wonderful phrase that he always says, which is keep calm and raise prices. That would be my advice as well. But it's a great strategy to be a fast follower. If you're a smaller roaster and the larger companies are raising prices, they've already given you permission, I would go for it.
Whenever you're in a business where you're constantly rotating the inventory and it's an agricultural product, the smart thing to do is to price on replacement and the replacement cost has gone up. The coffee you're roasting today, you might've bought it at a good price, but you will need to take that money that you've received from that product and buy a replacement for it and you'll need more money to do that. So you should raise prices for that as soon as possible so that you have the money to do that.
Where are prices going? Nobody knows. What will the price be? Nobody knows. Anyone who tells you that either has delusions or has an agenda. But there are more reasons to believe it will go up than to go down. If that makes sense to you, raising prices is a good strategy.
Liesa
If I rely on spot coffee purchasing from Covoya, should I change my buying practices by building a position and factoring in carry?
Rob
Let's break this down a little bit. So if you're a smaller roaster who maybe buys 10 to 20 bags a month or even less, and you have space constraints and maybe your demand fluctuates or you like to rotate new coffees in and out, there's a number of reasons why you could go hand to mouth with your buying. There may also be good reasons to build a position, but that's a conversation you need to have on your team and your spreadsheet needs to drive a lot of this.
Liesa
If Brazil's are so high and there's not enough to go around, what are some good alternatives?
Rob
Great question. There will be a shortage of Brazil's. There's not enough Brazil's to ship to meet existing need in the world right now. So there's the fact that the pipeline is going to empty. There's also the fact right now that the market is inverted—if you're not super savvy on how the C-Market works, it just means that the nearby price is more expensive than the future price—which creates a financial disincentive for importers and traders to hold coffee. The longer we hold it, the more we get penalized financially for doing so. So it creates an incentive to sell coffee as quickly as possible. As a result, the people who do have Brazil’s are going to sell them relatively quickly. I can envision a point where well before the summer, Brazil’s are pretty hard to find so it's a great time to be looking at alternatives.
If you can switch blends or if you can switch to things like central mild coffees, there’s going be a lot of opportunity for that. For example, if you are using a natural Brazil as a blend base where you just need it to have a cost component and a body component with some sweetness, Honduras, Nicaragua, those would be great coffees to look at because you don't need to go in and buy the top micro lot qualities if you're trying to replace standard natural Brazil’s and the pricing is going to be much better than where the Brazil's are right now. There's a lot of availability but you need to start looking at coffees that haven't landed yet and if you're not familiar with them you might have to take a leap of faith because when they land I would imagine there are people who have the same idea so it's a good time to be looking at your options, see what's coming, see what's shipping. All the centrals should start arriving, April through the summer and those who know what they want will have already done their buying so, the best time to start on that is now.
Liesa
How do current ongoing ethnic and geopolitical conflicts affect the C-Market price?
Rob
I would say that right now the biggest sort of geopolitical thing is the Red Sea issue if you look at what's going on there. The fact that every container bound for the US coming out of Africa now needs to go around the Horn of Africa instead of through the Red Sea, it's amazing that this is the new normal, and it is, and shipping companies have gotten used to it, but not only is it creating logistical bottlenecks because the extra two to four weeks that the containers are out of service, there's only so many containers in the world and they need to be brought back empty so they can be reloaded. But in the additional transit time and the additional cost, remember we talked about if you don't have coffee in the right place, the market keeps rising. And so coffee's trying to get to the consuming countries, but it's taking much longer and costing much more. The market keeps looking at where's the coffee? It's not where it's supposed to be. The price keeps going up.
Any further conflicts that happen that impact either shipping or the availability of coffee to get to port will only make things worse and it's out of our control. If you're a coffee buyer, it's something that you need to be aware of. I always get asked the question, what would you go to school to be a coffee trader or a coffee buyer? There's no great answer, but if I could go back and do it again, I'd be an economist. It’s the confluence of all the different events and all the different variables…the synthesizing of them together for me is the fun part, but it's also maddening if you're trying to make a decision quickly.
Liesa
How viable is Robusta as a lower cost alternative?
Rob
Yeah, not very right now. One of the things that's really caused this imbalance in supply and demand was a much earlier failure of the Robusta crop. It's a bit of dominoes here. We had issues with robusta going back more than a year now. Because we had not enough robusta available for the European roasters and the grocery store brands that were known for using robusta, they had to switch to Arabicas and that created a shortfall in Arabicas, which was then exacerbated greatly by a failed crop, or at least a very reduced crop in Brazil.
You add the logistics on there and it's been this sort of house of cards that has all fallen. The people buying Robustas right now are buying them because they have a profile that requires Robustas. They're not buying them on price. As a matter of fact, we had several trading days in this year where Robusta was more expensive than Arabica, which I never thought I would see in my lifetime.
If you're looking for cheaper coffees, you’re looking at mid to low grade African coffees right now, which are traded on flat price. You're going to look for low grade centrals and things like that. Robusta is not going to be it.
Liesa
What do you think is the biggest challenge facing the coffee industry today and in the near future?
Rob
I'm going to reject the framing of the question in that it's not just one, there is a few. I would say that for me the existential threat to the coffee industry itself is climate change. Nothing will make you understand climate change more than going to see coffee farms that have been in continuous operation for over 100 years because they have generational knowledge of when crops are due and we do the same thing every year on this week and now all those patterns have shifted. The places that never had pests have passed. Places that never had fungus have fungus. Coffee won't grow in places that it used to, and it's suddenly also starting to grow in places where it never used to, but where it's really not commercially viable. Another challenge is the viability of coffee farming as a business. It's just not commercially viable to farm coffee on a small scale. And at large scale, where the investment money comes in, there's probably better things to do with your money, right?
It's something that we as an industry need to grapple with. We have to find a way to make coffee viable for this next generation of roasters, farmers, small producers. It has to be not just interesting and romantic; it has to be a viable business and it has to be a way people can make a living. So the earth has to allow us to grow it where we need to grow it, and then we need to want to do that.
So those are my two major categories. I think, in the specialty industry, we're going to enter a moment of big challenge and change right now. High prices are going to be the catalyst for a lot of soul searching around what is specialty. If specialty existed as an alternative to low price commercial coffee, well, those days might be over if people are buying commercial-grade coffee at prices that were once specialty coffee prices. Is specialty going to rise above again and pay a whole bunch more? I don't know. Are consumers willing to pay for that? Let's find out. Or is specialty going to shift in its meaning toward a deeper connection to the places that it's grown and the people involved with it. I think it's an open question, but I think the question has to be asked now.
There's going to be not just threats, but fundamental changes to the industry. The good news, I think, is that there's still a whole generation of people who love coffee and want it to be a part of their life and they want to be a part of it. We get to work with those people every day. So that's the good part. And we are some of those people. I'm one of them. Still am after all this time.
