International Coffee Organization

Espressology on why locking in future coffee prices is key to reducing market volatility

Espressology Founder Instaurator says forecasting and locking in future coffee prices is key to reducing price volatility and providing customers with certainty for their business.

Some circumstances, however, are beyond control, such as the major frost damage in July that destroyed millions of coffee plants in Brazil. When a natural disaster like this occurs to the world’s largest producer of Arabica coffee, Instaurator says it inevitably affects all coffee prices globally.

“The last time there was a frost this serious in Brazil was 1994. So, it’s not unprecedented, although there are only a handful of people still in the coffee business who went through this back then. I was one of them and it was a hell of a ride,” Instaurator says. “The good news is that we have protected many of the main coffees we provide, by securing futures pricing.”

However, it is not possible to protect all coffees as the ability to do this relates to volumes, Instaurator says.

“For example, a New York futures contract, where Arabica coffees are traded, is effectively equivalent to one 20-foot container or approximately 20 tonnes of green coffee. If the volume for an individual origin is less than this, then it is not really possible to protect the price effectively,” he says.

There is also long-term global supply versus demand pressure underpinning the global price in addition to the frost crisis.

“Basically, for the past 20 years, coffee consumption has increased globally and not just in Australia, but particularly in Asia with hundreds of millions of new consumers now drinking coffee. It is likely that next year, global demand is going to outstrip supply as a result of the coffee plants going through a ‘recovery year’ and producing less. The frost in Brazil has made this situation even worse,” Instaurator says.

“Because it can take a couple of months to fully assess how widespread the effect of the frost is, no-one will really know the full extent of the crop damage until near the end of September. This is creating, and will continue to create a lot of uncertainty and volatility in global coffee prices.”

Instaurator says the next hurdle will be how much rainfall Brazil receives through October and November.

“The plants need rain to trigger the flowering and set the buds on the trees, which in turn become the fruit for the following year’s harvest. Poor rain this year equates to a poor coffee harvest next year. This will result in lots of volatility up until December this year,” Instaurator says.

“If there is poor rain, and a poor harvest next year, there will not be enough coffee to go around for everyone, hence the tremendous pressure on the coffee price.”

According to the International Coffee Organization (ICO), the monthly average of the ICO composite indicator reached 152.24 US cents per pound in July 2021, its highest level since 162.17 US cents per pound recorded in November 2014. Compared with the monthly average in October 2020, the beginning of the current coffee year, the level reached in July 2021 represents an increase of 43.8 per cent.

As such, Instaurator says the reality is that coffee prices will be going up for everyone pretty soon.

Despite the looming price rise, he says Espressology customers can rest assured that their coffee businesses will also be protected as best they can be, keeping in mind that Espressology succeeds only if its customers do too.

For more information on how Espressology can help you, visit espressology.com

© All Rights Reserved. BeanScene is a registered trademark of Prime Creative Media.