Taking too long? Close loading screen.

 

 

 

 

 

February 26, 2021      5 Minute Read


‘Milds’ Intrigue: The Price Quandry Facing Farmers

Carlos De Valdenebro

North American Managing Director

 

TAGS

About 3 months ago, while I was still in charge of Caravela’s Colombian operations, a group of farmer partners from the southern part of the country called me with a simple question; “Are prices going to remain high, or should we take advantage of the current market?” I answered the same way that I have for the last 10 years: “If I knew the future, I would be very rich and working from a beach”.

All jokes aside, as conversation continued farmers kept mentioning – quite rightly – that in 2020 Colombian internal prices were the highest they’d been in over years, so their interest in what the future might hold was understandable. Their next questions were, “Why are prices so high currently, and is this happening everywhere?” And, “How will this affect specialty coffee producers?” Pandora’s Box had been opened, and I’m sharing with you that conversation and analysis.

 

Let’s set some basic definitions:

  • The C-Market: or most commonly known as the futures market is where the global price of coffee is determined every single day by traders at the New York Stock Exchange/ICE. Its ticker is KC followed by the 5 terminal months¹ in which coffee can be delivered to a certified warehouse, as long as it meets the different quality standards set by the exchange.
  • Differential: Futures contracts are standardized in terms of the quality and quantity of a given commodity. Because of this, the futures price is representative of a typical range of qualities of commodities, and therefore is an average price. Depending on the specific product, there is a differential that adjusts the final price to the specifics of a certain origin/quality, which can be over or under the C-Market price. The over/under is primarily defined by the quality of the product, followed by internal supply and demand forces that push such differentials up or down (i.e., Colombia, because of its high quality always has a minimum premium of 400 basis points [+$0.04/lb] while Brazil has a minimum discount of 600 basis points [-$0.06/lb]).

That means that if the C-Market is at $1.00 then a Colombian coffee would at the very least always get paid $1.04/lb while a Brazilian coffee would get $0.96/lb

The following question from our farmers partners was: “Then why is the internal differential for the lowest quality now at 5,000 basis points ($0.50 /lb) now instead of the 400?”

 

Getting Confused? Hang in there. 

The C-Market may set minimum premiums and discounts, but market forces – supply and demand – set the final differential to be paid for a specific origin during a period of time. If Colombia suffers a drought which severely reduces supply, the differential for Colombia will increase more (and more quickly) than the differential for coffee from Peru or Honduras.  If Guatemala experiences a bumper crop one year, the differential for Guatemalan coffee will decrease vs other origins to reflect the increase in supply.

While these are the basic market mechanics, in practice things are often far more complicated. Despite every origin and every coffee being distinct, the interconnection of the market means that harvest outcomes can impact prices far beyond the borders of the origin(s) in question. In layman’s terms that means that if Guatemala has a bumper crop, a farmer in Peru might face reduced differentials, as roasters who normally buy from Peru might be tempted to replace some or all their inventory with Guatemalan coffee given more attractive prices, so they expect some sort of reduction in price from Peru.

So, what happened with the price question? By the end of 2019 and early 2020 Honduras had one of its smallest crops in years with a 20% drop, equivalent to a deficit of about 1.4 million bags of coffee. This created pressure on importers and roasters to find substitutes for the lost volume. Therefore, demand for milds (washed Arabica coffees from South and Central America) started increasing in these regions.

Then COVID-19 happened. Early in the pandemic, stores in the US quickly ran out of paper towels and toilet paper, not because there was an actual shortage but because everyone anticipated a shortage. In coffee, from February through April the demand spiked once again, driven by a fear of limited supply and lockdowns disrupting the supply chain, putting ever more pressure on differentials.

Why didn’t the C-Market react to this? Because in the 2019/2020 harvest Brazil had a record crop of over 70 million bags, 50 million of which were Arabica. If the C-Market does not react to supply/demand fundamentals, differentials will, as observed in the graph below.

 

Washed Arabica Differentials (2013-2021)

 

Source: EDF Maan

But how does this relate to specialty coffee, given that specialty farmers sell mostly on fixed price or on very high differentials? Nothing and everything all at once.

Most of the specialty coffee farmers that Caravela works with prefer to sell their coffee according to mid- and long-term commitments, where price is fixed based on a certain quality to be delivered. The few who do play the futures market have prices 50% to 300% above the prices that commercial farmers receive. However, there is a catch.

As with any free-market practice, benchmarking and price discovery are processes that occur almost in real time by the different actors. On one end you have specialty farmers and on the other end commercial farmers. The price at which commercial coffee is bought and sold is communicated via TV, radio, and newspapers almost daily, given the high liquidity of this type of coffee. In the smartphone era, coffee growers communicate with their friends through WhatsApp, knowing easily which buyer is paying the highest price in the market.

Source: FNC.

On the other hand, specialty farmers tend to have longer term relationships where price discussions occur a few times a year, allowing them to focus on producing the expected quantities and qualities. When their commercial coffee-producing neighbors start seeing 30% to 100% price increases (as seen in the graph above), the investments made by specialty farmers (and their unique and focused hard work) does not seem well compensated anymore. This is when the benchmarking and price discovery kicks in again, and price expectations increase. To give you an idea, in 2020 we lost 15% of the growers we worked with in Colombia in 2019, probably to commercial buyers paying good enough prices with less quality demands.

The pace at which price expectations increase for specialty coffee growers is slower than on commercial farmers. But the heightened expectations eventually materialize, pushing roasters sooner-rather than later to review their prices paid – if they want to secure the coffees they want.

So, what does the future look like? There are bullish signs everywhere: droughts in Brazil that occurred between July and September 2020 look certain to cause a 20-30% drop in the 2021 Brazil harvest. The Honduras harvest in 2021 will surely remain below 2019 levels. Minor damage from hurricanes in Central America will dent quality and volumes there. And the harvests in Colombia and Peru seem to have plateaued. All these negative factors affecting the supply of washed Arabica coffee mean that prices paid for coffee are surely poised to go up in 2021, either via high internal differentials or a bullish C-Market correction.

With that in mind, I told our farmer partners to focus on securing the current prices, continuing with long term planning, and contracting to guarantee the sale of at least 60-70% of their production to like-minded roasters, leaving 30-40% of their volumes exposed to market fluctuations with the assumption they can secure a home for it relatively quickly.

I would probably recommend the same to any roaster. But again, if I knew the future, I would be very rich and working from a beach.

 

________________________________

¹For example: KCH21, KCK21, KCN21, KCU21, KCZ21.

2 Comments

  1. Fredy León

    Carlos que buen artículo…! pero sin tener la bolita 2021 tendrá presión alcista, mi pregunta es, el consumidor final de café especial estará dispuesto a pagar por este incremento ? o tendrá que diluirse entre el comercializador y el tostador , quien lo asumirá ?

    Reply
  2. Rutilio Cruz

    Excelente articulo me encanto, tan claro la explicación del comportamiento del mercado.

    Reply

Submit a Comment

Your email address will not be published. Required fields are marked *

Was this interesting? Grab a coffee and pick another from the articles below

Agroforestry For the Planet: The Impact of Shade-Grown Coffee

Agroforestry For the Planet: The Impact of Shade-Grown Coffee

What Makes a B Corp a Different Kind of Business?

What Makes a B Corp a Different Kind of Business?

Sustainability: The Sextant of Our Navigation

Sustainability: The Sextant of Our Navigation

Taking Coffee Education Program to the Next Level

Taking Coffee Education Program to the Next Level

Learning from 2021 and Reflecting on the Future of Coffee

Learning from 2021 and Reflecting on the Future of Coffee

Cost Of Production Spotlight: Price Spikes ≠ Higher Incomes

Cost Of Production Spotlight: Price Spikes ≠ Higher Incomes

Receiving Coffee, Delivering Resilience

Receiving Coffee, Delivering Resilience

Recognizing Producers’ Commitment to Excellence in El Salvador

Recognizing Producers’ Commitment to Excellence in El Salvador

The Sum of Small Actions: PECA contributes to the reduction of GHG’s

The Sum of Small Actions: PECA contributes to the reduction of GHG’s

A Pivotal Moment for Specialty Coffee

A Pivotal Moment for Specialty Coffee

Long Distances, Long Histories: Getting Close to Coffee in Oaxaca

Long Distances, Long Histories: Getting Close to Coffee in Oaxaca

We are Best for the World 2021!

We are Best for the World 2021!

Transparent Teamwork with Local Cooperatives

Transparent Teamwork with Local Cooperatives

Planning Ahead: As bad as it sounds?

Planning Ahead: As bad as it sounds?

Growing and Thriving with Guatemalan Farmers

Growing and Thriving with Guatemalan Farmers

An Update on Colombia’s Ongoing Crisis

An Update on Colombia’s Ongoing Crisis

Mastering the Learning Loop in Peru

Mastering the Learning Loop in Peru

Supply Chain Hurricane: Weathering a perfect logistical storm in 2021

Supply Chain Hurricane: Weathering a perfect logistical storm in 2021

Making the Coffee World More Sustainable

Making the Coffee World More Sustainable

A Familiar Face Returns: William Ortiz at the helm of Colombia/Ecuador

A Familiar Face Returns: William Ortiz at the helm of Colombia/Ecuador

Cause and Effectiveness: Increasing Impact with the Sustainable Development Initiative

Cause and Effectiveness: Increasing Impact with the Sustainable Development Initiative

Shifting Calendars, Shifting Harvests

Shifting Calendars, Shifting Harvests

Third-Party Verification that Leads to Action

Third-Party Verification that Leads to Action

‘Milds’ Intrigue: The Price Quandry Facing Farmers

‘Milds’ Intrigue: The Price Quandry Facing Farmers

Guiding Farms in the Right Direction

Guiding Farms in the Right Direction

Our Best Coffee is Our People

Our Best Coffee is Our People

What’s Brewing in the Coffee Industry: Lessons Learned and What to Look Forward in 2021

What’s Brewing in the Coffee Industry: Lessons Learned and What to Look Forward in 2021

Why Add Yeast ?

Why Add Yeast ?

Polar Promise in Las Palmas: A Case Study of North Star’s El Salvador Origin Project

Polar Promise in Las Palmas: A Case Study of North Star’s El Salvador Origin Project

Peru 2020: Rising Up From Lockdown

Peru 2020: Rising Up From Lockdown

Traditional Varieties in Latin America

Traditional Varieties in Latin America

Ecuador 2020: Making Our Way in the Middle

Ecuador 2020: Making Our Way in the Middle

Climate Neutral Caravela 2025: Steady Steps Towards a More Sustainable Future

Climate Neutral Caravela 2025: Steady Steps Towards a More Sustainable Future

A Primer on Transparency + Traceability Part II

A Primer on Transparency + Traceability Part II

A Primer on Transparency + Traceability Part I

A Primer on Transparency + Traceability Part I

How to Create a Specialty Coffee Line to Attract Commercial Coffee Drinkers Into The Specialty Coffee World? Part II

How to Create a Specialty Coffee Line to Attract Commercial Coffee Drinkers Into The Specialty Coffee World? Part II

How to Create a Specialty Coffee Line to Attract Commercial Coffee Drinkers Into The Specialty Coffee World?

How to Create a Specialty Coffee Line to Attract Commercial Coffee Drinkers Into The Specialty Coffee World?

A Take on Long-standing Relationships: Hasbean and Pedro Claros

A Take on Long-standing Relationships: Hasbean and Pedro Claros

Futures Contracts: What, Why, How  Part Three: Futures 103 How Hedging Works

Futures Contracts: What, Why, How Part Three: Futures 103 How Hedging Works

Futures Contracts: What, Why, How Part Two: Futures 102

Futures Contracts: What, Why, How Part Two: Futures 102

Futures Contracts: What, Why, How Part One: Futures 101

Futures Contracts: What, Why, How Part One: Futures 101

Grade Expectations: Finding Versatility and Value in A and AA Coffees

Grade Expectations: Finding Versatility and Value in A and AA Coffees

A Presentation on Cost of Production In Latin America

A Presentation on Cost of Production In Latin America

Meso-American Producer Survey: The Pandemic Will Leave Long-Lasting Scars

Meso-American Producer Survey: The Pandemic Will Leave Long-Lasting Scars

Invisible Barriers for Moving Coffee

Invisible Barriers for Moving Coffee

Caravela at 20: The Journey is Only Getting Started

Caravela at 20: The Journey is Only Getting Started

Certifiably Awesome: Passion and Persistence Turn Promise into Parchment in Mexico

Certifiably Awesome: Passion and Persistence Turn Promise into Parchment in Mexico

Harvest Arrives, Along with a Pandemic

Harvest Arrives, Along with a Pandemic

Minga From Field To Filter: Coffee Reacts and Adapts to the Covid Era

Minga From Field To Filter: Coffee Reacts and Adapts to the Covid Era

Mother Nature Turns The Volume Down in Nicaragua

Mother Nature Turns The Volume Down in Nicaragua

LOTSA Potential: The Long-Term Supply Agreement as a Tool for Financial Stability and Building Relationships

LOTSA Potential: The Long-Term Supply Agreement as a Tool for Financial Stability and Building Relationships

Progress in a Picture-Perfect Coffee Setting

Progress in a Picture-Perfect Coffee Setting

The Price and Value of Consistency

The Price and Value of Consistency

Looking Back and Leaping Forward

Looking Back and Leaping Forward

Womxn-Powered Coffee: Why It Matters

Womxn-Powered Coffee: Why It Matters

Behind the Scenes in Peruvian Coffee

Behind the Scenes in Peruvian Coffee

Unpoppable Opportunities for the Future

Unpoppable Opportunities for the Future

Equipping the Equipo: Playing to win in Guatemala and El Salvador

Equipping the Equipo: Playing to win in Guatemala and El Salvador

Agronomy to Keep the Microlots Coming

Agronomy to Keep the Microlots Coming

Evolution in a Land of Revolution

Evolution in a Land of Revolution

Cupping as Meditation

Cupping as Meditation

Origin Revelations

Origin Revelations

Avoiding the Poverty Trap: Choosing Stories Instead of Emotional Marketing

Avoiding the Poverty Trap: Choosing Stories Instead of Emotional Marketing

I’ve Bean Everywhere, Man

I’ve Bean Everywhere, Man

Have Yourself a Mara Little Christmas

Have Yourself a Mara Little Christmas

All Roads Lead to Coffee

All Roads Lead to Coffee

How Coffee can Complement Food

How Coffee can Complement Food

Building Projects at Origin

Building Projects at Origin

Coffee: Culture or Business?

Coffee: Culture or Business?

Café: ¿Cultura o Negocio?

Café: ¿Cultura o Negocio?

A Study on Costs of Production in Latin America

A Study on Costs of Production in Latin America

Fermentation Experiments in Nicaragua – How We Managed to Go from RTB to AAA

Fermentation Experiments in Nicaragua – How We Managed to Go from RTB to AAA

Constantly Adapting to Change

Constantly Adapting to Change

Mind the Gap: A Growing Gray Area Between Market and Production

Mind the Gap: A Growing Gray Area Between Market and Production

Embracing Technology to Create New Pathways in Coffee

Embracing Technology to Create New Pathways in Coffee

Forward Contracting to Secure Quality, Quantity and Relationships

Forward Contracting to Secure Quality, Quantity and Relationships

Caravela Sponsors Seven Small-holder Coffee Producers to attend the Producer and Roaster Forum in Guatemala

Caravela Sponsors Seven Small-holder Coffee Producers to attend the Producer and Roaster Forum in Guatemala

Colombian Specialty Coffee Scene. A Perspective from Café Quindío

Colombian Specialty Coffee Scene. A Perspective from Café Quindío

Coffee Sampling  Increases Farmers Profitability Opportunities

Coffee Sampling Increases Farmers Profitability Opportunities

Caravela From a Newcomer’s View

Caravela From a Newcomer’s View

Water Activity: Predictive insights Changing Processes and Profits

Water Activity: Predictive insights Changing Processes and Profits

Blending Experience with Passion in Mesoamerica

Blending Experience with Passion in Mesoamerica

Coffee in Galapagos: Evolving To Thrive

Coffee in Galapagos: Evolving To Thrive

What Traceability Offers Farmers

What Traceability Offers Farmers

The Specialty Coffee Transaction Guide – Setting the Bar on Prices

The Specialty Coffee Transaction Guide – Setting the Bar on Prices

A Tale of Two Customers: Caravela Coffee and the Rethinking of the Coffee Import Model

A Tale of Two Customers: Caravela Coffee and the Rethinking of the Coffee Import Model

Arriving at a price

Arriving at a price

Rich Farmer, Poor Farmer

Rich Farmer, Poor Farmer

Low Prices, Risky Times

Low Prices, Risky Times

Making it Work as Well as it Can

Making it Work as Well as it Can

Discovering the Source

Discovering the Source

A Mutual Evolution: Caravela Nicaragua’s William Ortiz, on helping people grow coffee, and how coffee helps people grow

A Mutual Evolution: Caravela Nicaragua’s William Ortiz, on helping people grow coffee, and how coffee helps people grow

The High Price of Getting the Best from Ecuador

The High Price of Getting the Best from Ecuador

Victims of Exchanging Currencies – Who Should Take on this Risk?

Victims of Exchanging Currencies – Who Should Take on this Risk?

A Pilgrimage to the Future

A Pilgrimage to the Future

Why We’re Investing in World Coffee Research?

Why We’re Investing in World Coffee Research?

The Making of a Champion

The Making of a Champion

Peru, an Unpolished Diamond in Coffee Production

Peru, an Unpolished Diamond in Coffee Production

Investing in Education: Investing in People

Investing in Education: Investing in People

How Roasters Can Influence the Supply Chain

How Roasters Can Influence the Supply Chain

Aromas: More than Just a Coffee Competition

Aromas: More than Just a Coffee Competition

FOB vs. EXW – Two Buying/Shipping Methods for Your Green Coffee

FOB vs. EXW – Two Buying/Shipping Methods for Your Green Coffee

Sample Roasting vs. Profile Roasting

Sample Roasting vs. Profile Roasting

How to Keep Records of your Costs of Production?

How to Keep Records of your Costs of Production?

Why and How to Estimate Costs of Production in a Coffee Farm?

Why and How to Estimate Costs of Production in a Coffee Farm?

Supply Chain Logistics – The Clockwork of Coffee

Supply Chain Logistics – The Clockwork of Coffee

Forecasting Green Coffee Purchasing

Forecasting Green Coffee Purchasing

What is specialty Coffee

What is specialty Coffee

Drying in Peru: the Final Step in Quality Improvement

Drying in Peru: the Final Step in Quality Improvement

FOB vs: EXW – Two Buying/Shipping Methods for Your Green Coffee

FOB vs: EXW – Two Buying/Shipping Methods for Your Green Coffee

When is it time to harvest?

When is it time to harvest?

Just In Time Inventory

Just In Time Inventory

Spectrum Purchasing and How it Impacts Sustainability

Spectrum Purchasing and How it Impacts Sustainability

  • This field is for validation purposes and should be left unchanged.

Translate »

Pin It on Pinterest

Share

Share this content with your coffee community!