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Coffee and the Market: What Moves Prices

July 07, 2014

 
    In the first part of this series, we talked about the headlines we've seen recently about rising coffee prices, and linked to a number of articles. Most of them pinned much of the blame for the higher prices on the drought in Brazil, the largest coffee-producing country in the world. Obviously, when a country that accounts for more than 30% of the world's coffee production has a very bad year, it's going to affect the price of coffee worldwide. However, the largest portion of Brazil's coffee crop goes to the commodities market. Weather problems in Brazil have a proportionally smaller effect on prices for coffee on the specialty market. There are, however, a lot of other factors that do have an effect on specialty coffee prices.  

Individual Markets

  First, it's important to remember that on the specialty market, place of origin has a major effect on the price that buyers are willing to pay. Countries that have a reputation for producing high quality coffee, and that have invested in the infrastructure for growing, processing, storing and moving coffee will generally be able to command higher prices for their crops than others. Thus, you'll generally pay less for coffee from Uganda, which is less robustly developed, than you will for coffee from Ethiopia, which has invested a great deal of time, thought and energy into developing its capacity to produce high quality coffee.  

Quality Coffee, Great Organization

  These aren't hard and fast rules, though, and they're becoming less hard and less fast as individual farmers, coops and processing stations start making a name for themselves. The Cup of Excellence program has helped make a big difference in helping raise the profile of high-quality coffee producers. For those not familiar with CoE, it goes like this. Each year, coffee producers in countries with a CoE program get to submit samples of their coffee to the program. The coffees go through several rounds of tasting by regional, national and international judges, with a coffees that score above an 85 advancing to the next round. After the final round of scoring, the top 10 coffees are awarded the Cup of Excellence and the right to display the Cup of Excellence seal. All coffees that score more than 90 points in the second-to-final cupping are awarded a Presidential Award, and all CoE coffees are immediately auctioned at an online auction. CoE winners can command incredible prices, and the patina of their win generally extends to other coffees from the same producer.   CoE is only one of many ways that buyers reward quality coffee with higher prices. Many of our roasters make frequent buying trips to countries of origin where they taste dozens -- sometimes hundreds -- of coffee samples to find coffees that they want to offer to their customers. Better coffee can command higher prices.  

Weather/Climate

  Coffee is an agricultural product, and like any agricultural product, its production is subject to the whims of Mother Nature. Coffea arabica is more finicky than most. It demands a vary narrow range of temperatures, rainfall at a specific time and in specific amounts and a extended dry season at the right time for optimal production. When the weather deviates even a little, the coffee tree produces fewer flowers, or the flowers don't set fruit, or the fruit ripens too slowly or too quickly, or the picked cherries go moldy before they finish drying. In any case, there's less coffee produced, and less supply means higher prices.   Coffee's delicate nature makes it unusually prone to the effects of a changing climate. Many of the areas that have been big coffee producers are seeing unusual weather events -- monsoons, droughts, unusually long rainy seasons, cooler weather than usual, hotter weather than usual. Over the past few years, countries in eastern Africa and South America have been affected by these weather anomalies nearly every year.  

Industrialization/Urban Growth

  In many coffee-growing nations, the forests that once were full of coffee trees have been stripped to make room for human population growth. In some of these countries, children of coffee farmers are opting to live in the cities where they can take jobs that offer a steady paycheck without the uncertainty of raising crops.  

Disease

  Anyone who has been paying any attention at all to coffee industry news has heard of roya, a fungus that eats the leaves on coffee trees. Roya has been a problem in coffee-growing regions for more than 40 years, but never to the extent of the past year. In Central America, in countries like Guatemala and El Salvador, as many as 80% of coffee farms are affected by the fungus. Those farms may see all of their coffee crops for the year destroyed, but worse -- many are losing their trees as well. It will take several years before replacement trees are mature enough for full production.  

Increased Demand

  The good news is that more people than ever are drinking coffee, and more of them want high-quality specialty coffee. The bad news is that more people than ever are drinking coffee, and more of them want ihigh-quality specialty coffee. It's a basic rule of economics: when demand exceeds supply, prices go up. In the past few years, the coffee craze has spread to countries that have always preferred tea. Coffee consumption is growing in China, Russia and India, as well as in traditional coffee-drinking countries like the U.S. and European countries.  

Labor Costs

  Not all factors are negative. One of the better consequences of the specialty coffee industry's commitment to excellence is a willingness to pay higher prices for better coffee. A portion of those higher prices go into the pockets of farm laborers who tend the plants, pick the coffee and process the cherries. By ensuring a fair wage for laborers, the specialty coffee industry helps make farming an attractive occupation, which in turn helps sustain the industry.  

Affordable Luxury

  While we're talking about rising prices, let's get a little perspective. We feature coffees from the best artisanal coffee roasters in the country. Currently, our most expensive coffee will run you a whopping $20 a pound. Using the golden ratio (15g of coffee to 250 ml of water), that's just about 30 cups of coffee, or about 66 cents a cup. That's what we mean when we talk about coffee as an affordable luxury - you can enjoy the best coffee the world has to offer for less than you'd pay for a double cheeserburger off the Dollar Menu at Mickey D's. Keep that in mind  next time you see a headline screaming about the skyrocketing price of coffee.  



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