Issue 5 - October, 2021 - Brian Martell

Coffee Corner

Frosts, Speculators and Draughts 

Every 5 to 6 years or so, the coffee market goes through what financial analysts like to call “a correction”.  To the uninitiated, this means that all hell breaks loose, and prices gyrate, usually up, in a most un-natural way.  Well, the time has come, and we are amid another correction, but this time with a hint of Pandemic Panache.  At the beginning of this year, the near-in terminal on the ICE (Intercontinental Exchange – where green Arabica coffee is traded on the Futures) was at about $1.40/lb.; in recent weeks, it has been as high as $2.20/lb.  What (or who) is forcing the market to these extreme peaks and valleys?  Every crisis is unique in its own way, and this one is no exception.  There are themes that we have seen in the past that are driving the market; droughts and frosts in Brazil come to mind (both happened this year), as well as speculative trading.  Indeed, over 75% of all trades on the ICE are made by non-industry players; roasters make up a small percentage of all transactions.   Added twists that contributed to this year’s rise in price was the closing of almost all seaports in Colombia precipitated by civil unrest and general strikes.  Thankfully, these issues have since been resolved.

What has made this more interesting is that this change in the commodity has happened during a time of economic upheaval where we are experiencing inflation on all items fueled by the double whammy of labour shortages and supply chain disruptions.   The shift in the economy away from communal events (working in an office, meeting up with friends at a restaurant, attending a concert, etc.) towards more solitary pursuits has shifted buying patterns.  The increased activity of on-line shopping for consumer goods of Asian origin has increased the flow of shipping containers from east to west to the point where it is economically viable to send container ships with empty containers across the pacific east to meet the demand for west bound traffic.  Pre-pandemic, a 40-foot container from China to the West coast of North America would cost about $4,000; now it is north of $20,000 for the same trip.  Unfortunately, coffee also travels in container ships.  The added costs to transporting coffee from net producing nations to net consuming nations (read North America and Europe) has had an initial influence on differentials (the premium paid for coffee above the exchange grade base) upwards, and then an impact on the overall market price.

Another notable effect of the changing supply chain shift from macro deliveries (retailers) to micro deliveries (direct to home consumers) is packaging.  Corrugate manufacturers are having a hard time keeping up with the demand caused by more overall tonnage of corrugate sold but converted into smaller boxes than before.  This demand has, in some cases, more than tripled lead times while also provoking double digit price increases.  For those of us in the foodservice industry, regardless of the product, this has translated to greater costs.

The more dire coffee prophets are warning that current events facing the coffee industry are symptomatic of climate change.  They claim that global coffee production will be adversely affected should there be no significant change in the warming trends forecasted by climatologists.  All caffeinated apocalyptic predictions aside, there are a few things that we need to remember; coffee prices rise and fall as sure as the sun; humanity has lived through worse pandemics in the past and lived to tell the tale (or at least record them in history books); and economic trends come and go – sometimes quickly while others may linger.  We shall get past this.

Brian Martell 
The Heritage Coffee Company Ltd

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