How does coffee price volatility affect roasters?

Kahwei Yoong
October 11, 2021
coffee price

Like most globally traded commodities, the market price of coffee is susceptible to sudden and dramatic changes.

In 2019 alone, the price of arabica fluctuated between a low of $2.66 per kilogram and a high of $3.46 per kilogram. Today, it is at more than $4.7 per kilogram.

The causes of price fluctuations are complex and wide ranging, from global pandemics to rising per capita incomes.

And while there is little coffee roasters can do to prevent these sudden changes, knowing how to prepare and respond to them can help to significantly reduce their impact.

To understand more about price volatility and how it affects coffee roasters, I spoke with UK-based coffee trader, Sam MacCuaig.

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Buying and selling contracts on the coffee commodity market sets the C price

What determines the market price of coffee?

The Intercontinental Exchange (ICE) is a commodity exchange market based in New York City.

Coffee is traded on the ICE through a financial instrument known as futures contract – a legal agreement in which someone commits to buy or sell coffee at a predetermined price at a specific date in the future.

Each futures contract has a basic unit of 37,500 lbs of green coffee (which is the size of one shipping container). Therefore, the buyer of a futures contract can expect to receive a physical delivery of exchange-grade green beans once the contract expires.

Sam is a trader at Keynote Coffee, an organisation that focuses on trading specialty, high commercial, and certified coffee with European and Middle Eastern markets.

He explains that buying and selling contracts on the coffee commodity market – also known as the C market – sets the C price. This is the trading price of arabica coffee.

“The New York price is a reference point for people to price coffee,” he says. “It is purely determined by what people are willing to buy and sell – fundamentally, the supply and demand.”

There are many factors that can influence the supply and demand of coffee, including political strife, logistical problems, extreme weather conditions, and rising income per capita.

For example, coffee prices in Brazil skyrocketed in July 2021 due to widespread outbreaks of frost, which destroyed much of the country’s coffee plants. Meanwhile, Chinese coffee consumption has been increasing by around 30% per year, which has also had a significant impact on the market price.

“When supply decreases and demand stays the same, the value of the goods increases,” Sam tells me. “Essentially, when supply is greater than demand, prices will fall. When supply is lower than demand, on the other hand, prices will rise.”

It’s also important to understand the distinction between macro and micro factors. According to Sam, significant changes in the market are usually due to something fundamental-based, such as frost or massive oversupply; whereas minor adjustments are generally as a result of “speculative bets”.

“Broad movements are fundamentals, while small, daily fluctuations are just noise in the market,” he says.

Coffee prices are determined by changes to supply and demand

Causes of price volatility & its impact on coffee roasters

In theory, whenever there are changes to underlying supply and demand, the market will correct itself to a point of equilibrium. This is what’s known as fair value: the point at which supply and demand are balanced, producing a fair value price for the product.

However, Sam explains that the inelasticity of both supply and demand for coffee means that it’s susceptible to frequent swings away from this price point.

“Supply and demand shocks cause price movement,” he says, “but the reason there is such a big move is due to the static nature of both supply and demand. It is harder to react quickly on both sides – and that makes the swings bigger.”

Coffee is a perennial crop which takes around three to five years to mature. This means that producers will not be able to change their production output instantly in response to price signals. As such, supply remains relatively fixed in the short term, making it difficult to stabilise prices.

Demand is similarly static due to the lack of coffee substitutes together with consistent consumption. In other words, it is unlikely someone will stop drinking coffee completely when prices are high or start drinking ten cups of coffee when it becomes cheaper.

This is the case in the commodity market – but is specialty coffee immune to these price swings?

“People often think about specialty as being separate from the C market,” he says, “but most of the time, it’s not. Coffee is mostly traded on a differential (in other commodities, it is called basis), which is the difference between the New York price and the final price of the product you are buying.

“The New York price provides a benchmark and the differential is either added on or taken away depending on the product, its quality, and its supply and demand. Therefore, movements in the C market will undoubtedly affect the specialty coffee industry.”

Indeed, according to an article by the New York Times, rising green coffee prices has left many specialty coffee roasters worried they might have to pass on the higher costs their customers, which may affect sales.

There are a number of ways in which coffee roasters can prepare themselves for price fluctuations

How can coffee roasters protect themselves against price volatility?

Naturally, coffee price fluctuations affect everyone involved in the coffee supply chain. Therefore, it is important for coffee roasters to do everything they can to protect themselves against any sudden or unexpected changes.

One approach is to build long-term relationships with producers through relationship coffee or direct trade.

Under this model, coffee is traded at prices based on real operating costs and the true value of the product, thereby insulating both producers and roasters from market speculation and daily C price fluctuations.

“While this can be an effective strategy, it is very important that everybody is on the same page with regards to what happens when prices go up,” Sam says.

He explains that although roasters are paying a price that is above the C price when the market is stable, a sudden upswing in the market might change a producer’s expectation of what they can earn. For that reason, it’s important both parties are in a position to help each other work through volatility together.

Sam also recommends that roasters work closely with importers or traders. As the people deeply involved with green coffee, the experience of importers and traders can help roasters navigate through any market movements.

“Risk management is important,” he says. “And I don’t mean futures or the complicated technical stuff, but rather understanding your risk in general and what you can tolerate as a business.”

As roasters scale their operations, risk management becomes increasingly important as bigger businesses have a lot more at stake when making decisions.

“Ultimately, I think it is really important, especially on the specialty side, that roasters understand that they are exposed to these market forces,” Sam tells me.

“We do a very good job of differentiating what we do from commercial coffee, but we often forget that it is still coffee and the industry is intimately connected.”

For roasters, it’s crucial to make the necessary preparations in order to protect yourself against any changes to supply and demand. This includes having an ample supply of coffee bags that are ready for market.

At MTPak Coffee, we ensure you maintain a consistent level of stock with our easy order service. Choose from a range of options, including our low minimum order quantity (MOQ) bags for micro roasters and those who just need a top up.

For information about our low MOQ coffee bags, contact our team.

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