I'd like to take a look at the coffee market: where we've been, where we are and where we seem to be headed. So far I am batting a thousand when it comes to predictions on the future direction of coffee pricing that I've made in this publication. I am relieved and pleased by this record, but it will not be easy to maintain. We are in a range, futures-price-wise, that leaves lots of room for interpretation and assumption. Basically, there needs to be a new "driver" that will awaken the traders and force their hand, clarifying which way they wish to place their bets -- and dragging us along for the ride.
With the current terminal month of March sitting at $1.19 (as of this writing, in late January), we are basically all the way back to where we were before the market took off on the concerns over rainfall (or lack thereof) in Brazil in 2014 and 2015.
Several conditions have contributed to the fallback in prices, not the least of which is that Brazil's crop last year was not as bad as expected, and this year's crop is shaping up to yield a solid harvest, putting world supplies back in a positive light.
Added to this, we have oil at an incredibly low price that has brought the Brazilian real (the national currency) down in lockstep, as the nation is a large exporter of that "other" black liquid too. With a low real, selling coffee priced in U.S. dollars, even at lower market levels, is not as painful, and the sell side of our market has been there to keep a lid on futures pricing, so far.
In wondering where we might go next, I have had several green traders express the belief that we can't go much lower. I like to point out the $0.4250 figure we hit in 2001, and remind them that it wasn't all that long ago -- and represents a further drop of roughly $0.80 from where we are now.
I am by no means suggesting we will re-test that level -- and actually, I really hope that we don't, since that would betoken a serious global dilemma of one sort or another, which would likely hurt us more, financially, than we could offset by the windfall that a historically low market would bestow upon us.
Locking up futures here is not a bad idea at all. Historically, we are right about average in this range and, if you don't mind seeing a lower market while you are fixed here, that would be a fine decision.
If you would like to take a chance on further price improvement, I would recommend keeping your eye on the market and not locking in too far into the future unless we see a dip below $1. That said, I also recommend going ahead and booking, should you see the market begin to ascend and break through the $1.40 level, combined with some kind of macro news, whether crop- or weather-related. This would likely signal a tectonic shift in market direction that might not abate for some time to come.
There is another, more interesting dilemma that has been developing for many years and now seems to be reaching a bit of a tipping-point. It may have as great an effect on our product and costing as the market itself. With the growth in fair trade organic coffees and the continuing development of many coffee-growing nations, the supply of available coffees traditionally used in OCS at the higher end of the quality range is getting very tight. This will likely impose some tough choices on roasters, as well as distributors and operators, going forward.
When I say high end of the range, I refer to the High Grown and Strictly High Grown/Strictly Hard Bean that, contrary to what specialty folks might think, have been used by our industry for our high-end offerings for many, many years. What is happening is that coffee-growing areas in premium-origin countries such as Guatemala and Costa Rica are slowly giving way to developers. Drive out of Guatemala City and you will find that what were once lovely rolling plantations of coffee trees are now industrial building sites.
This leaves the world with less of the highly coveted Central American beans right at a time when they are a big component of the taste profile favored by many consumers.
Exacerbating this is the continued movement of many growers into the Fair Trade program. Why wouldn't they take advantage of this, which guarantees them a better price per pound than the (supposedly) open free market can provide?
This has distorted the supply/demand curve, to the point in some cases where there is more Fair Trade Organic available than demand dictates there should be, and not enough of the same quality non-FTO to go around.
All of this means that as we move forward, we will need other countries to continue to improve their quality profiles in order to give us good blending alternatives, or we will need to step up pricing beyond the adjustments demanded by the vagaries of the futures market if we are to continue to get the quality we want, and require, to remain competitive in serving an ever-growing, quality-conscious populace.
KEVIN DAW is president of Heritage Coffee Co. (London, ON, Canada), a private-label roaster serving the breaktime management industries. A 30-year veteran of OCS, water delivery and vending operations, he has concentrated on coffee roasting for the past two decades.