“A lot of farms are being abandoned,” says Sonia Vásquez, an organic coffee grower on the slopes of San José, south-west Honduras. “A lot of people are migrating — many can no longer make ends meet.”
Over the past six years Ms Vásquez, 46, has seen her crop devastated by disease — a coffee tree fungus that has ravaged parts of Latin America. Now her business has been wrecked by tumbling global prices — the value of her crop has shrunk by almost a third over the past year, falling well below break even.
Yet this should be a boom time for growers like Ms Vásquez based in the “coffee belt”, the region over the equator between the Tropics of Cancer and Capricorn. Consumers are drinking more — from drip coffees to vanilla lattes to cold brews — than ever before, but Ms Vásquez and other farmers from Peru to Papua New Guinea and Ethiopia to Ecuador are struggling. Prices of arabica beans — 60 per cent of the market — have fallen to a near 14-year low of around 90 cents a pound on the Intercontinental Exchange.
The value of the global coffee industry has almost doubled in the past decade to $90bn, according to Euromonitor. Despite fears that climate change could reduce supply in the medium to long term, a combination of better than expected harvests with more efficient producers and currency markets has conspired to keep wholesale prices low.
Both Brazil and Honduras last year reported record coffee output, while Colombia has been producing its highest levels since the 1990s. But demand has not kept pace and there is a massive oversupply in the market.
The true cost of your £2.50 coffee
35% Shop costs/rent; 25% staff costs; 15% tax plus additional costs; 10% profit; 7% cups, napkins, stirrers; 4% milk; 4% coffee
Price of just the coffee:
(Source: Allegra Strategies)
“This has surpassed an economic crisis. People are moving away [from the farms]. They are absolutely heartbroken,” says Roberto Vélez, chief executive of the National Federation of Coffee Growers of Colombia. “Consumers don’t know what is really going on.”
Affected farmers in Guatemala and Honduras have been joining the migrant caravans to the US, while some in Peru and Colombia are turning to coca, the source of cocaine, say traders. And while in the short term there may be plenty of beans, the exodus from coffee growing, especially that of the higher grade product, has fuelled worries among buyers about the sustainability of future supplies.
“If the situation continues, I’m not sure where we are going to be in five years’ time,” says Matt McDonald, procurement manager at Cafédirect, a UK coffee importer whose main suppliers include Peruvian co-operatives. “It’s a detrimental cycle because [the growers] cannot afford enough fertiliser, the quality reduces, the yield reduces. And it gets worse each year.”
Some multinationals are already acting to secure supplies by providing farmers and co-operatives with technical support and tree saplings. In September Starbucks committed $20m to smallholder farmers in El Salvador, Guatemala, Mexico and Nicaragua.
Nestlé, the world’s largest coffee buyer which invests about SFr68m ($67m) a year on technical support programmes for farmers, acknowledges that the price situation is unsustainable. But it adds that addressing the issue of farmers’ income is beyond the scope of any one company, and that it is “engaging with the International Coffee Organization” to try and find some solutions.
Coffee is largely divided into robusta, the hardy lower quality bean which is turned into instant coffee or blended into espressos to add a bitter kick, and arabica, the smooth mild tasting higher quality bean. Arabica is graded from high — the beans grown at altitude which are wet processed — to lesser quality, farmed at lower altitudes and dried in the sun.
At the root of the price problem is the increased production of low-grade arabica coffee, say traders, which is dragging the whole market lower. “There is too much commodity grade coffee,” says Stephen Hurst at Mercanta, a UK-based trader focused on the speciality end of the market.
This flood of beans has driven the arabica futures price — traded on the ICE and known as the New York “C” — lower. Coffee is bought and sold using the New York price as a reference, with higher grades traded at a premium and lower grades priced at a discount. The current benchmark has meant that even those producers who receive a premium are not able to break even. The New York C has averaged about $1.20 a pound over the past three years. But over the same period the cost of producing, processing and transporting the beans has, for some growers, been more than $1.50 a pound.
This has led producers to seek a new way to price their coffee and bypass the New York C as a benchmark for the industry. Some are dealing directly with growers or co-operatives to negotiate a price based on their costs and profits.
Mr Vélez says Colombian growers are desperate to untangle themselves from the New York market, because it does not reflect the true value of the high-grade coffees produced across Latin America. He adds: “Why do I have to be tied to a market which doesn’t work?”
Opponents argue the situation has been made worse by the rise of digital trading, where algorithms — some of them programmed to act on forecasts of Brazilian output — execute trades in anticipation of the market rising or falling, exacerbating price volatility.
Like many agricultural commodities, the coffee market is prone to “boom and bust” cycles where high prices trigger the planting of more trees and better management, resulting in improved production. In the case of coffee, the cycles are accentuated as it is not an annual crop and once a tree is planted it will continue producing although yields and quality tend to drop. But when the trees first mature — up to four years after planting — the new output can weigh on prices. And those lower prices can then lead to poorer quality beans and less output.
In this environment Brazil has come to dominate the market. Not only is it the largest producer and exporter of coffee, accounting for 28 per cent of the world’s coffee trade last year, its farmers can grow their beans at low cost, with a break-even point of below 90 cents per pound. For many of its growers, harvesting is mechanised, with mass production allowing beans to be processed in much simpler ways compared with those in Central America and Colombia.
The country produced a record 62m 60kg bags last year, while a weak currency offered local producers and exporters higher returns on beans sold overseas. And although output is predicted to take a breather this year, it could produce another large surplus in 2020. “Other producers may see falls in production,” says Carlos Mera, senior analyst at Rabobank. “But it’s unlikely to be enough to compensate for the likely increase in Brazil.”
Yet even for low-cost farmers in Brazil, current prices are starting to hit profits. José Marcos Magalhães, president of Minasul, a large coffee co-operative in Varginha in the south of Minas Gerais which exports to 17 countries, says many of its 8,000 members are smallholders whose margins are being squeezed. “If this price range continues, there will be unemployment,” he says.
Lúcio de Araújo Días, commercial head at Cooxupé;, Brazil’s regional co-operative and its largest coffee exporter, is adamant about what is to blame for the relentless drop in prices: financial speculation. Over the past five to six years, these financial players have taken their cue from the largest producer and exporter, Brazil, and since 2017 have held record short positions, betting on a fall in prices, at a time when non-Brazilian producers are already struggling to cover their costs.
“The global financial market is selling coffee thinking it can go on forever,” says Mr Araújo Días. “The funds are selling endlessly, every day they sell.”
Ever since the New York coffee exchange, now part of ICE, opened in the 1880s, speculators have been blamed for manipulating prices. Apart from buyers and sellers of physical coffee locking in their prices using futures, participants such as hedge funds also place bets on rising or falling coffee prices.
However, the level of speculation over the past year has led to questions from buyers and sellers, who use the benchmark to hedge their future purchases and sales, about the efficacy of the market.
“The speculators’ short positions are massive,” says Steve Pollard, coffee analyst at London-based brokers Marex Spectron. “But while they exaggerate the moves, they don’t determine the overall direction of the market.”
Although the growers’ stories are often used in the marketing of individual coffee brands, consumers are largely oblivious to the current plight of the farmers, assuming that the increased price they are paying for their morning brew is — at least partly — passed on to the producer.
But in an everyday £2.50 brew, the coffee itself accounts for about 4 per cent, or around 10p — rent, labour and tax taking a much larger portion of the cost.
“The cost of coffee is really marginal [for the retailer],” says Jeffrey Young, chief executive of consultants Allegra Strategies. “Even if your coffee beans go down 30 per cent, the cost of cups and workers has gone up, the rent has probably gone up and everything else has gone up.”
Paying farmers a fair return for their beans has been the focus for some progressive roasters and traders in an attempt to “decommoditise” coffee.
Ken Lander experienced the pain of the grower first hand when he quit his legal career in the US to live in San Rafael de Abangares, in north-west Costa Rica. He bought a coffee farm almost as a hobby, intending to live off his US real estate sales, but lost all his assets in the 2008 financial crisis and was forced to start selling his beans.
He quickly realised that the batch of coffee he had just sold — which was roasted in the US — was generating about $30,000 in retail sales of which he received just $600.
The 52-year old teamed up with other growers and entrepreneur Michael Jones to start a coffee importing business in 2011 in Atlanta. Thrive Farmers, which buys from about 1,000 farmers across five countries, has a revenue sharing model designed to give 50 to 75 per cent of the revenue from the beans’ retail value to growers.
“How do you create a gross margin for a farmer that actually incentivises them to want to stay in the business?” asks Mr Lander, who is now Thrive’s chief sustainability officer while still growing his own coffee. “Our farmers have made three times more profits than their next best offer in the marketplace.”
Back in Honduras, Jairo Murillo, who grows coffee between the country’s capital Tegucigalpa and La Paz, needs to earn a living for his family. “We can’t survive,” says the 27-year-old who has a 1.7-acre farm. “Lots of people have left because of this. I’m thinking about leaving, or I’ll sell if I can find a buyer. There’s no other option.”
Mr Lander says that like Thrive, many coffee companies from large to small have their own programmes to help the grower, but acknowledges that something more structural across the industry needs to be put in place.
“If we don’t, as a coffee industry, come to realise that a farmer cannot continue to grow coffee and make almost no margin or a negative margin, then we’re going to have issues,” he says. “You don’t have to be an economist to figure that out. It’s not that hard.”
High-end beans ‘Specialist’ market faces supply line fears
The number of farmers who can no longer afford to stay in the industry is a particular concern for buyers of high-grade beans who rely on smallholders to produce unique flavours.
The so-called “speciality coffee” sector often relies on the farmers’ personal stories to market their brands. The concern is that the current market gyrations will drive out all but the most efficient producers — those in Brazil for arabica beans and Vietnam for robusta. “Do we want a world where all the arabica is only available from Brazil?” asks one leading coffee company executive.
Speciality coffee — from the artisanal drip in a café to the single-serve pod in a home machine — is going from strength to strength. Loosely defined as coffee above 80 on the Specialty Coffee Association’s tasting scale of up to 100, it now accounts for more than half of the coffee consumed in the US. And many executives now accept that the industry New York “C” pricing benchmark no longer properly reflects the value of speciality beans. “Speciality and commodity coffee need different kinds of price discovery,” says Peter Roberts at Emory University’s Goizueta business school in Atlanta, Georgia.
One of the issues has been a lack of information as the details of price agreements are often closely guarded. Some high-end roasters and traders negotiate directly with growers and co-operatives for high-grade coffee, paying the farmer based on costs as well as the retail price,
In 2014 Prof Roberts started Transparent Trade Coffee, a website that offers price information. And together with coffee consultant Chad Trewick, he has launched a speciality price guide based on data supplied by 21 importers, exporters and roasters in 10 different countries. The latest data show that in 2017-18, prices ranged from about $1.55 a pound to $9.05 with the median at $3, compared with a market average of about $1.
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