coffee crisis

Coffee in crisis: Australia’s response to low coffee prices

Coffee prices are at their lowest in more than a decade. Australian industry leaders tell BeanScene how this affects their relationships with farmers, the local market, and the future of coffee.

Where will the coffee industry be in 50 years? A hopeful barista might tell you that coffee will resemble wine, with their role like that of a sommelier, recommending premium coffees from a select reserve list. Another could warn you of the perils of climate change, putting 50 per cent of coffee producing land at risk. But what if we faced an industry in which producers focus solely on volume and cherries are picked by machine?

Campos Coffee Founder Will Young says with record-low prices being paid to coffee farmers, this “coffee dystopia” could very well become a reality.

“The situation is soul destroying. At a time when the specialty coffee movement is getting bigger and bigger, the C Price is getting lower and lower, which is pushing coffee farmers to give up on coffee all together or just say, ‘forget it, we’ll go for volume instead’,” Will tells BeanScene. “If it continues this way, we’ll go back into a recommodification stage, where there’s no nod to terroir and it will all taste the same.”

The International Coffee Organization (ICO) says the coffee market has experienced a continued downward trend since 2016. On 7 May 2019, the daily price fell to 89.31 US cents per pound, its lowest point since 2006.

Most of the world’s coffee is traded as a commodity on the New York Stock Exchange (NYSE) . On this “C Market”, the C Price, the amount in US dollars Arabica coffee is traded for, is largely determined by supply and demand as well as speculation through futures contracts, deals to buy coffee at a later date for a price determined in the present. 

Sasa Sestic, Founder of Ona Coffee and Project Origin, says in theory, futures contracts allow coffee roasters to back their future supply chains if they predict a low yield. However, actors from outside the coffee industry have complicated things.

“What’s happening is hedge funds and investors, who understand the market and stock exchange, are buying the futures when prices are low and selling their stock when prices are high,” Sasa says.

coffee in crisis
Sasa Sestic says people from outside the industry have too much sway over coffee prices.

“People setting the prices are not working in coffee. A majority of them have not even visited a farm.”

John Russell-Storey, Marketing Manager – Trade at green bean trader Cofi-Com, says many consumers falsely assume that how much they pay for a latte reflects what farmers receive for their coffee.

“The reality is a complex maze of skills and expertise from growing, milling, grading, distribution on the green side, then roasting, blending through to the end cost of espresso equipment, baristas on the roasted side,” John says. “These are factors that New York doesn’t reflect.”

Elements that can play into speculation and the value of coffee include the strength of the US dollar, the Brazilian real – where a majority of coffee is grown – and production levels.

Campos Coffee’s Will says overproduction from Brazil is a key contributor to the C Price decline. 

“Brazil has overproduced by the same quantity of coffee that Colombia produces. When you get that much more volume going into coffee, it’s going to push prices down,” Will says. 

While the majority of specialty coffee is purchased through direct trade instead of the C Market, Sasa says these low prices are still affecting high-end producers.

“Maybe 10 per cent of the coffee we buy worldwide is specialty, but 90 per cent is purchased as a commodity. Besides that, a lot of specialty coffee is also bought with a differential based on the NYSE, so when the C Price plummets, so does the specialty price,” Sasa says.

Craig Dickson, Managing Director of Veneziano Coffee Roasters and CEO of Nomad Coffee Group, says many producers are forced to sell the majority of their crop at C Market prices.

“Specialty grade coffee is maybe only a fraction of what farms produce. Yes, specialty roasters will buy the specialty grade coffee at fair prices, but farmers still need to sell the entire crop to make a living,” Craig says. 

Fairtrade Australia and New Zealand CEO Molly Harriss Olson says low prices are only one part of a “perfect storm” currently hitting coffee production, with climate change, decreased soil fertility, competition for natural resources, and an ageing farming population all clouding the future of coffee production.

“Apart from the obvious economic implications of low prices for coffee-farming families, there are significant knock-on effects,” she says. “If coffee farmers collectively are pushed any further into desperate circumstances, the crop itself will suffer. The specialty segment of the market won’t be immune to the long-term potential impacts.”

coffee crisis
Despite a thriving specialty coffee scene, Australia’s coffee industry still impacts the commodity coffee price.

WHY SHOULD AUSTRALIA CARE?
Ona’s Sasa says Australia has one of the most developed coffee scenes in the world and exerts significant influence globally, but it isn’t exempt from responsibility or the flow-on effect of the low C Market.

“We have a lot of big coffee roasters, and people from all over the world follow what we do in Australia,” Sasa says. “But the Australian dollar has dropped a lot in the last few years. Many businesses are struggling and there’s so many cafés in places like Melbourne. In order to go forward, a lot of roasters think they need to buy a cheaper product.”

Campos Coffee’s Will says as some specialty roasters grow and are acquired by larger companies, they can lose sight of what makes coffee special.

“With such low prices, a lot of companies are going back to buying commodity coffee,” Will says. 

He suggests this has led many companies to invest in marketing over sustainable sourcing practices.

“You’re seeing a lot of really brilliant packaging and clever marketing coming out now because they’re competing on that rather than on quality and how the coffee actually tastes,” he says. “This also confuses the consumer, thinking they’re supporting true specialty coffee, but in fact they could be purchasing commodity.”  

Nomad Coffee Group’s Craig says this type of short-term thinking poses a severe threat to the future of the coffee industry.

“Record low coffee prices will have an extremely negative effect on our supply chains in the future. We need to be very conscious of that,” Craig says. 

“I don’t think consumers especially have any idea of the potential long-term effect this will have on them. Farmers have no ability to invest in their farms, leading to a decrease in yields and quality, and therefore less income. Growers are then forced to replace coffee with crops that will provide them with better income. This means there may be less coffee in the future and prices will go up, but at the same time, the quality of coffee could suffer.”

coffee crisis
Fairtrade can facilitate closer relationships between roasters and growers, alongside its certification, accountability, and community investment. Image: Fairtrade ANZ/Josh Griggs

PAYING A FAIR PRICE
Some green bean traders, like Cofi-Com, buy specialty coffee through a deeply embedded origin network, benefiting from feedback at every major origin. These networks operate through field operatives working closely with farmers on progressive social, environmental, and agricultural practices.

“Through these programs, farmers know they have a market for their coffee through us at a fair price. Knowing this in advance, they can plan their next season crop. In turn, we benefit from accurate, timely advice, invaluable for our long-term planning. If farmers aren’t receiving a fair price, there’s always the possibility they’ll understandably turn to a cash crop that takes less time and effort,” John says.

“With any commodity, and coffee is no exception, it pays to take a long-term and local view of New York pricing. For us, it means a focus on making sure we have the right quality coffees at the right price in stock. At a local level, day to day the New York price has little impact if we’ve bought and forecasted correctly.”

Roasters are also capable of purchasing their coffee through direct trade, with some making efforts to increase transparency in their coffee buying to support farmers. This has included publishing the prices they have paid for coffee, whether that be free on board, direct to farmer, or to the importer. While this can support the credibility of the individual brand, Fairtrade’s Molly says systemic change is required across the industry to ensure the benefits of fair prices and accountability are felt by more coffee farmers.

“Direct trade can be very powerful and is a good way to see what is happening to coffee farmers on the ground, but there is no verification of claims, and anybody can say anything,” she says.

Molly says Fairtrade exists to address power imbalances in global commodity trade structures. One way it does this is by facilitating independent, third-party auditing and transparency throughout supply chains, providing consumers the assurance of fairness that has to be taken on faith in many direct trade relationships.

Fairtrade also requires the first buyer to pay farmers the Fairtrade Minimum of US$1.40 per pound, with an additional Fairtrade Premium of 20 US cents per pound, which delivered US$100 million to farmers in 2018. A quarter of this premium is directly reinvested in businesses and community projects, including training, education, and health care.

“It’s not as simple as roasters paying higher prices to traders, or coffee buyers handing over more money for a flat white,” she says. “Because control of the global industry is in the hands of just a few major corporations, we need everyone who cares about coffee to demand transformational changes throughout the supply chain.”

Coffee crisis
San Fernando Estate in Antioquia, Colombia. A long-term partner of Veneziano Coffee Roasters.

THINKING LONG TERM
Veneziano Coffee Roasters and Nomad Coffee Group believe in forming longstanding partnerships with producers. Their sustainable coffee program includes developing long-term relationships, paying premiums, ensuring traceability of its coffees, and giving back to the local communities.

“Our agreements on price are not based around the C [Market]. Instead, they are based on the sustainable, long-term viability of the businesses,” Craig says. “This is achieved via minimum volume commitments over a number of years in advance. Our arrangement enables the farmers to continue running profitable businesses and investing in their farms to achieve our mutual current and future quality commitments.”

Through Nomad Coffee Group’s contract roasting arm, Black Bag Roasters, Craig says the company is also able to buy more coffee from its producers than a typical specialty roaster.

“We’re able to go in and buy specialty coffee from a producer for Veneziano but can also purchase larger volumes of their high-grade commercial coffee for use in Black Bag Roasters,” he says. “As we are buying both specialty and high-grade commercial coffees, we are able to have a bigger impact on the profitability and long-term viability of the producers.”

Despite Nomad Coffee Group’s individual commitment to its producers, Craig believes collective action is required from the world’s largest coffee buyers to address coffee prices.

“Nomad Coffee Group is a fair-size business, but we don’t make a blip on the world as far as global coffee volume goes,” he says. “The major players who sell commodity coffee on an international scale need to make a stand and take the lead.”

Ona Coffee has also not let falling coffee prices impact the way it does business.

“We are not paying the farmers we work with a smaller premium than we were last year. I don’t think we should just because we can,” Sasa says. “We are kind of ignoring what’s happening with the C Market and rewarding producers for quality if they produce it, and if they’re not, working with them to improve it.”

Sasa believes helping smaller producers improve their coffee quality makes them less reliant on the C Market and does this through green bean trader Project Origin. This began with a project in 2015 to improve the coffee quality of Finca El Arbol in Nicaragua.

“It was a commodity farm for more than 100 years, producing 77- or 78-point coffees. The owner decided it was too hard, and we were silly enough to take up this project,” Sasa says. “It’s proved difficult, but with a great team and carbonic maceration processing, in four years, we’ve turned this farm from commodity to specialty.”

Sasa says while the whole industry needs to address low coffee prices, roasters – especially in Australia –are responsible for raising awareness.

“If we can have influential roasters talking more about it, who believe in supporting producers, we can make consumers more aware,” Sasa says. “Each one of us depends on what happens at farms.”

coffee crisis
Campos Coffee’s Will Young warns that low coffee prices could have ramifications on the future of the specialty industry.

PROMOTING EXCELLENCE
As well as purchasing its coffee using high quality-based differentials and fixed price contracts, Campos Coffee’s Will believes promoting “luxury coffees” from auctions like the Cup of Excellence and Best of Panama can help producers receive higher prices.

“This brings awareness to how coffee can taste significantly better than the average cup of coffee you find through commodity,” he says. “These competitions have shown farmers they can find a market for their hard work. And they make the news. When you sell a coffee for US$803 per pound, it gets in the papers. That makes people look up and see that not all coffee tastes and is worth the same.”

By promoting the best of the best, Will hopes raising the reputation of coffee will cause consumers to stop viewing it as a commodity.

“In much the same way as wine, probably in the 80s or 90s, people became aware of how much better Bordeaux-produced wine was than your typical red wine,” he says. “Hopefully, that’s happening in coffee, but we have to keep pushing and talking about it.”

Will says if industry bodies do not soon take action, the opposite will happen instead.

“It’s about the future of coffee. If we don’t get involved, farmers will keep leaving farms, and there will be nothing for us to buy,” he says. 

“If we don’t support those who produce real specialty with the appropriate price, we’ll lose all the 85-to-89-point scoring coffee. We’ll be left with this big gap where we won’t be able to find beautiful coffees to make espresso or standard blends. You’ll only have this dystopian future where there is only expensive luxury coffee and the rest is commodity.” 

This article appears in the August edition of BeanScene Magazine. Subscribe HERE.

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