This bi-annual article about the coffee commodity ("C") market has, at customer request, become a fixture on our website.  This fourth installment brings some interesting developments, a few new theories and yet more factors that could affect the stability of prices and the availability of fine specialty green coffee in the coming year.  These are our best estimations of the impact that physical and trade factors may have on the C market and related coffee issues - there is no guarantee of outcome implied by this article - just our best professional opinion, free for you to consider or disregard. 

I must start off by saying three critical words which comprise one concept that you must always keep in mind while thinking about coffee buying: supply and demand. 

As we have seen in the last six months, there has been no change in the market's potential for volatility, and there is no foreseeable change in that existing potential.   Commodity investment funds will likely continue to enter and exit the coffee market as they strike their investment return target.  This is one contributing factor to the market's volatility.  The continued influx into commodities of investment fund monies has provided an increased basis for volatility.  Commodity fund investment will continue to assert its presence in the C market as these investors attempt to repeat past profit-making investments.  Expect similar volatility levels this year. 

There is always a concern that weather in Brazil, either freezing temperatures and/or shortfalls in precipitation and moisture, can arise in our Spring and Summer.  These events should be anticipated and considered by the astute coffee buyer, and a plan of action considered beforehand.  Remember, the last frost of 1994 and the drought of 1996/97 caused the C market to rise to $2.64 and $3.18, respectively. These "above normal" prices were sustained for 19 months and 15 months, respectively!  I am not making these numbers up...and we all know that weather events appear to be more and more extreme...

Robusta coffee has continued its upward pressure, hitting 9 1/2 year highs just two weeks ago.  For the past 7+ years, robusta prices have risen steadily.  Prices are pushing close enough to low quality C arabica prices as to make it a close call whether to buy arabica instead of robusta.  This has the potential to tighten the supply of arabicas should buyers pass on buying robusta and choose arabicas instead (thus creating higher demand for arabicas and push the price up). 

In the last update I wrote about China and Eastern Europe's increasing appetite for specialty coffee.  To my eyes nothing has changed regarding that subject.  You hear it all the time how those countries are increasingly "Westernizing" and looking to replicate the middle-class lifestyles of the Western world.  What has changed in coffee growing regions to meet that new demand?  By our view, not much.  That means more pressure on a finite amount of coffee and higher prices.  

Six months later, and still unresolved, is the USDA-NOP (U.S. Dept of Agriculture-National Organic Program) issue regarding the interpretation of rules applicable to the actual inspection and certification of organic products.  It has created HUGE concerns for us (and other importers, roasters and consumers as well).  About 9 months ago, the USDA-NOP, which issues regulations regarding the use of "organic" certification in products imported and sold as "organic" in the USA, issued an interpretation that required all coffee growers (co-op or estate) to be inspected annually for compliance with USDA organic rules and regulations.  Many coffees are produced via cooperatives - i.e., groups of farmers who commingle their coffee crop with that of others for processing, sale and export.  So, for example, while there may be 500 growers in a co-op, previous USDA-NOP regulations allowed approximately 20% (or 100) of those co-op farmers to be physically inspected on an annual basis for compliance in order to renew the co-op's organic certification.  Now, with this new rule interpretation, all co-op members must be inspected annually!   This has huge ramifications:  First, increased costs for farmers.  As we all know, every inspection requires money.  Costs for the farm-based organic inspections include travel, time, meals, transportation and expenses for the inspectors in addition to the "inspection charge".  Second, matters of logistics.  Many, if not most, farms exist in remote and not easily accessible locations.  Often times, these farms are reachable only on foot, and boundaries, while known to the area residents and workers, are not clearly delineated.  The longer it takes to access and inspect the farms, the more expensive the process of obtaining organic certification becomes for already struggling farmers.  Third, time away from other farming duties.  Farmers cannot simply let inspectors fend for themselves in such remote regions.  They must take time from their farming duties to assist inspectors and provide them with the access necessary to inspect their farms.  Fourth, a difficult time understanding and implementing the ever-changing American organic rules.  These regulations are thicker than most books.  The fact that they keep changing (with no apparent relation to how they affect those who must implement them) doesn't help farmers who have limited access to education, difficult, unreliable or non-existent communications systems, and limited resources (see "First" above).  So, will we have a monumental crisis in organic coffee in the coming years?  We don't know because the USDA/NOP has pushed back meetings and further rulings on this indefinitely.  While organics have always carried a substantial premium, we may be looking back longingly at current organic prices, if you can believe that.

Another segment of specialty coffee is Fair Trade Certified.  While we have heard roaster rumblings of growing dissatisfaction with Fair Trade and the manner in which reporting is handled as well as the cost to roasters in relation to the return of services from Fair Trade staff and the use of certification premiums (money) by FTC staff, sales of this certification continue to grow.  Continued issues arise regarding co-op certification and availablity, as well as pockets of concern regarding quality.  I will tell you that we will not carry any coffee unless we consider it to be a fine specialty coffee, regardless of certifications...  It will be revealing to see how well received the price differential paid for Fair Trade Certified coffees is in an up market like the one we are seeing as I write this!  The floor price for Fair Trade Certified coffees also was raised several months ago, by a sum of 10 to 15 cents. One must wonder, with the base price for an organic now sitting firmly at $1.51 p/pd, whether the initial desire to assist the farmers financially has been met?  Remember, when Fair Trade was launched the C market price was between 55 to 65 cents per pound, and the belief was the farmers needed at least $1.00 to $1.10 p/pd to be profitable, reinvest in their farms and grow more coffee.  Might a floor price under $1.25, plus a differential for quality, be a more competitive and market-linked answer to farmer well-being that would reward good farmers for good coffee?

Every year, Reuters polls coffee traders from large, commercial coffee groups around the world to get an outlook on the C-market.  The most recent poll on Jan. 23, 2008, was mixed and wide-ranging.  The forecasts for where the C market would end up by the end of March 2008 ranged from a low of 1.18, a median of 1.35, to a high of 1.75.  The same traders forecast a low of 1.05, a median of 1.30, and a high of 2.30 for the end of 2008.  Most all traders expressed the opinion that the ultimate size of the Brazil crop this year will be the main price guiding factor, with a larger crop expected to depress prices on the C.   Investment fund positions and investment in the C market continue to strengthen.  With this comes added volatility, and with their overwhelmingly long position (meaning they expect the C market to rise) of over 65,000 lots, I fully expect the market to move upwards.  Recent technical trading information also suggests that the C may rise to a 1.50 before beginning a possible move downward. 

CRYSTAL BALL:  I firmly believe the days of the "under a dollar" market are over, and Vournas Coffee Trading is hopeful that we are correct on this for the sake of all the farmers in specialty coffee.  Lower prices create short-term deals for roasters but a long term crisis for production, and inevitably higher costs in the future from short supply.  Put another way: the lower the price for coffee, the less farmers make.  The less farmers make, the more likely they will pull their trees and plant a more viable and profitable cash crop.  The more trees get pulled, the less coffee is available and the more coffee will cost.  So, your initial deal turns pretty sour in time...

There is a continuation of fixed (rather than differential) priced offers out of origin.  There is also a growing reluctance by producers to enter into long term contracts for delivery.  In these instances the cost of coffee becomes more fluid with each delivery.  This adds volatility.  It goes without saying, coffee roasters need coffee.  Every year there are an increasing number of roasters looking for specialty coffee beans in a finite and over-stressed world of available fine specialty coffee beans.  I would continue to advise that in the volatile world of coffee commodity trading you should plan ahead to determine your bean needs.  If you are able to book out/contract your needs, you should do so.  Locking in to a fixed price, or in some cases a fixed differential, ensures a smooth supply at palatable and profitable prices for you.  As of this writing, the current NYBOT "C" Market future for a March 2008 coffee contract is approximately 1.44* per pound. 

Please feel free to call or email any of us to discuss the market and how it could impact your needs.  These are our best  professional estimates of how we see the physical market in the days, weeks and months ahead...

Happy Roasting!

* Remember, the "C" market price is before the addition of differentials for quality which affect every specialty arabica coffee, as well as additional price premiums added for various certifications (Fair Trade, Organic, Rainforest Alliance, etc.) which may or may not apply.