Economy & Trade

The future of coffee is in our hands

Let’s get straight to the point: Coffee is in crisis.

This may sound alarmist especially when the world’s largest producer of coffee, Brazil, has recently announced a bumper crop that has defied all expectations. So surely this should be cause for cheer?

Well, yes and no.

The good news is that Brazil has just recently reported a bountiful coffee harvest with a record 60.2m bags, up nearly a fifth from the year before. If we combine this achievement with improved processing methods and introduction of more disease resistant varieties, the increase in production now confidently puts global stocks back into surplus for the crop year 2018/19; even against a backdrop of steadily increasing demand by 2% year-on-year.

But Brazil is no ordinary coffee producing country. Exporting more than a third of the world’s coffee, Brazil’s sheer output alone can shift the coffee market price in either direction. Recently, the Brazilian Ministry of Agriculture and Colombia’s Federación Nacional de Cafeteros (FNC) issued a joint statement to demand urgent action over low coffee prices. 

These well-founded concerns are a wake up call to the industry as the market price for arabica has plummeted to around $1/lb on the futures commodity exchange in New York – representing a 57-month low. In the past year alone, the arabica trading price has fallen by nearly a quarter and the outlook looks just as bleak if Brazil is to continue its streak of record-breaking harvests. During the last sustained coffee crash of 2000, it took nearly five years for the price to recover back above the $1/lb threshold.

Historically, price falls on the commodity markets are often precipitated by reports of higher-than-expected production yields. And the market has responded unreservedly. Emboldened by a strong dollar, traders are betting that less volatility caused by a recent glut in supply will see coffee prices decline even further. The phenomenon is already being called the ‘big short’ as price speculation – largely driven by hedge fund high frequency trade algorithms – seeks to derive profit from taking short positions in a ‘bearish’ market.

So what is the market really telling us?

It doesn’t take a crystal ball to see that the market is aggressively calculating against smallholder agricultural practices in favour of efficiency gains resulting from industrial-scale mechanised farming systems – often at the expense of coffee growing communities and the environment. But to address the market fundamentals, we need to take a quick look back in time.

The first recorded futures contract was codified during the reign of the Babylonian King Hammurabi in Ancient Mesopotamia in 1750 BC. It was intended to ride out the peaks and troughs of the annual harvests and cushion producers against price volatility as supply and demand fluctuated.

A long-term insurance policy if you will.

Over the centuries, the future markets became a force of their own in global mercantile centres like London, Tokyo and New York. They enable buyers and sellers to agree on a specific price on a certain commodity at a point in time in the future, whilst creating liquidity in the marketplace. So far so good. However, since the ‘big bang’ of deregulation in the seventies and eighties, the international financial system has transformed future contracts into something that King Hammurabi could have never imagined.

Today, approximately 90% of contracts made on the ICE ‘C’ Futures market exchange are traded purely as a financial instrument. Although their value still remains firmly tied to a physical cash crop, the profits derived by hedge funds from buying and selling these contracts against a future price has become the primary motive – without ever taking delivery of a single bean. And that is why financial speculation in New York or London, can force a coffee producer out of business in Latin America, Africa or Asia.

When we consider that farmers receive a fraction of the market price when their coffee leaves the farm gate, the future of coffee production is perilously in unprofitable territory. The stark reality is that coffee grower income is now lower than the cost of production, which is driving them into debt and out of business. Currently, 25m smallholder producers who are directly dependent on coffee production are now struggling for survival. Yet the true impact of this current price collapse on the next generation of coffee producers will only be fully felt in years to come. When only a tenth of the value of the world’s $200bn coffee industry stays in producing counties, according to Coffee Barometer 2018, we ignore the long-term task of rebalancing the coffee value chain at our own peril.

It’s easy to feel depressed by the current situation but the specialty coffee market does provide glimmers of hope. As exporters, traders, roasters, coffee shop owners – and ultimately consumers – pay premiums for higher quality and traceability, the coffee price in specialty is largely divorced from the market price in New York. Allowing for country-to-country variation, this means that prices well above the cost of production are offered and the rewards can be extraordinary for highly-prized coffees. While this is to be celebrated on the one hand, the uncomfortable fact remains that the vast majority of the world’s supply of coffee is still traded through a dysfunctional futures market price mechanism.

Given that hyper-trade price speculation on the commodity markets creates more, and ever deeper, cycles of boom and bust the challenge of combating this unsustainable form of economic fundamentalism seems insurmountable. Yet the bottom line is that if the price mechanism is to prevail, it must add value. Otherwise, the ‘wisdom’ of the futures market will soon become nothing more than a bankruptcy of speculative ideas. 

Change, however, is gathering momentum and the ‘insiders’ know it. Online platforms that directly connect producers with buyers are empowering more transparent supply chains that bypass the market mechanism. Pioneering genetic research and agronomic advances, along with more rigorous sustainability standards are also helping to pave the way. While paradigm-shifting blockchain currencies and public digital ledgers are fast becoming new methods of value exchange that are challenging the legacy financial systems rooted in the past. 

So what is stopping us?

As a global coffee community we have the power to call for more transparent forms of trade that fairly distributes value amongst coffee producing countries. Of course, there are many structural challenges to tackle on the ground and bold decisions to be taken about how we rebalance the value chain, but the fruits of a sustainable coffee future depend on the conversations and actions that we can – and must – take now.

Because the future of coffee is, literally, in our own hands.

 

***

Disclaimer: As a roaster and writer about coffee, I have no horse in this speculative race. But I cannot stay silent when coffee producers face such an existential threat at the hands of price manipulators for reasons of pure profit. This article is an effort to add my voice to the growing chorus of outrage at the current coffee price crisis. Only by standing together can we mobilise all actors along the value chain in the fight for a fairer, more sustainable coffee future.