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GREEN COFFEE PRICES: This Time May Be Different, But History Argues Against Panic

by Kevin Daw
Posted On: 1/11/2011

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Coffee prices have risen steadily from their historic lows early in this decade, and the continued increase is causing a good deal of discussion. Some say that the world has changed, and the market factors that worked to correct green coffee price spikes in the past are no longer effective. Is this time really different?

I've been told that during the recent National Automatic Merchandising Association CoffeeShow in Las Vegas one of the speakers warned operators that the green coffee market could hit $3, so they should buy for a year out right now, if they can.

If he's right, people will see him as a guru. Should he be wrong, no one will remember anyway, so he had nothing to lose by throwing that figure out there. But it was the first I had heard of such a dire prediction, and it got me to thinking more about my own stance on where the market is headed.

There is no magic crystal ball involved when it comes to predicting the future path of the coffee market -- or any other market, for that matter. People keep asking me where the market is going next, and I keep telling them that if I knew, I'd have a much larger boat.

In order to estimate where it will most likely migrate -- and at what speed and strength, and to what peak -- one can only reference two sources of information: the players in the game who are cognizant of the supply/demand equilibrium, and the lessons of history.

By those in the game, I mean the exporters, producers, selling agents and technical analysts of green coffee. Among these folks, there are varied opinions, usually formed on the basis of their own perspectives and positions. A grower in Mexico, where production has been habitually lower in recent years, may be far more bullish than an exporter in (say) Brazil, where abundant crops are forecast.

So relying on what one hears from this group is sketchy at best, and may leave listeners frozen in fear when the time comes to decide which direction to take in planning to meet their coffee needs, going forward.

Incidentally, the consensus I get from this crowd is that the market has not finished heading upward -- more votes for the $2.60-to-$3 range. The NAMA speaker has cast the only $3 vote I've heard about, but only time will tell.

If we cannot find any agreement among the people with the best information on the contemporary market, we must turn to history. So I went back and studied all the bullish events that have affected the industry over the past 40 years. For purposes of comparison, I only noted events that pushed the price over the $2 threshold, as has recently happened again.

When I added all the $2 crossings, I came up with five prior events.

In 1976-'77, the "black frost" hit Brazil; this was the biggest event of the bunch. The market went over $2 in December of '76, hit a high of $3.30 in April 1977, and by October of the same year was back down below $1.50.

In 1979, the green price crossed $2 in July, hitting $2.23 before getting back to $1.80 by September, and $1.70 by January 1980.

1986 saw the market cross $2 in January to a quick high of $2.87, then settle back to $1.60 by August.

In 1994 it went from $1.44 to $2.44, all within the month of July, and was back to $1.60 by December.

Finally, in 1997, it crept from $1.40 in April to a June high of $2.28, and dropped back to $1.50 by October.

So what can the OCS operator take away from these details?

First, that none of these events lasted an entire year, and even the worst event took nine months to shake out the speculators that drove the market to record highs in 1976-'77.

Second, that only one event ever drove the price over $3.

I suppose it could be argued that, adjusted for inflation, the numbers would appear different; but markets do not act upon the rules of inflation, only on the guesses and actions of those involved. Just as the housing bubble went too far, and before that, the stock bubble, market events arrive, get overblown, and retreat as the sharks move on to warmer waters.

One interesting aspect of our current market is that for the past few years, "differentials" -- the price paid above or below the market, to reflect a truer sense of a particular coffee's quality -- have risen substantially. This really should be considered as part of the overall increase that prices have already experienced.

As an example, when the market hit the $1.60 range back in June, the differentials on Colombian coffees were being quoted in the vicinity of 70¢ to 80¢ over the "C" market price. This put the effective price of green Colombians in the neighborhood of $2.40. In past bullish events, this was not the case; Colombians traded at no more than 30¢ over, so it could be argued that we effectively crossed the $2 line as far back as June.

Ironically, most farmers, when asked how they are enjoying this newfound money, will frown, annoyed that they did not hold out longer. No one is ever happy with events such as these.

I am by no means suggesting anything from all of this information, but I have found it gives at least some sense of comfort to know that when the inmates take over the asylum, and the market shoots to the stars, history strongly suggests that rational minds eventually prevail. Stay tuned.

KEVIN DAW is president of Heritage Coffee Co. (London, ON, Canada), a leading private-label roaster serving the breaktime management industries in North America. He is in charge of coffee buying for Heritage. A 30-year veteran of the workplace service business, Daw has served as a commission coffee service salesman, a principal of a vending operation and president of a bottled water company. Since 1990, he has concentrated on coffee roasting. Active in industry affairs, Daw is a Specialty Coffee Association of America Certified Brewing Technician, a member of the National Beverage and Products Association Hall of Fame, a recipient of the National Automatic Merchandising Association Supplier of the Year Award and a NAMA Coffee Ser­vice Committee member.