Coffee’s Price Collapse: How Did We Get Here and What Can We Do?

Coffee is looking better than ever. Great in-season, single-origin coffees can be easily found in most major cities across the globe, and most of the time, that coffee comes with a strong sense of connection to where it came from, with stories about producers, experimental processing or sustainability.

A quick look at the coffee media, and it really looks like the future is here. Panamanian Geisha prices continue to set new pricing records. There’s a new roaster-brewer cold brew collaboration every week. Blockchain has the potential to revolutionize our supply chains. But is this the true story of coffee, or are things actually quite a bit darker?

What $1 Per Pound Means

On Monday, Aug. 20, the New York C price for coffee dropped below $1 per pound for the first time since 2006. While the $1 mark is an important psychological marker, the fact is that prices have been unsustainably low for years. 

Research conducted by Fair Trade USA in partnership with Cornell University and four Latin American cooperatives underscores the crisis underway. Smallholder farmers in Peru, Honduras, Colombia and Mexico had an average short-term break-even cost of 90 cents per pound for parchment coffee at the farm gate. This breakeven calculation is truly just that: short-term break-even — it only includes labor, supplies and taxes. What it doesn’t include are costs related to sustaining the farm or equipment in the medium term, the value of a farmer’s labor, or long-term reinvestment in the farm.

Additionally, this farmgate price is what the individual farmer earns; the C market instead references the free on board (FOB) price that includes, at a minimum, additional transportation costs. In the case of organized farmers, this also includes the costs associated with running a cooperative that provides quality control, agricultural training, marketing/sales and other services.

Accounting for a 20 percent shrink in the conversion from parchment to green, this short-term break-even cost increases to $1.08 for green coffee, and when the best-case scenario for a Latin American farmer is receipt of 87 percent of the export value — many producers receive significantly less than this share of the FOB price — a roaster would need to pay a price of at least $1.24 FOB for that producer to cover their basic out-of-pocket-costs to create a short-term, break-even point. Without a price floor or high country or quality differentials across the bulk of a producer’s volume, the math just doesn’t add up.

In 2016, the International Coffee Organization (ICO) found that the composite market price for coffee was consistently below the 10-year average and that, when taking inflation into account, the January 2016 composite price for coffee was roughly $0.02 higher than it was in January 2000, contributing to strained liquidity at the farm level and putting the livelihoods of coffee producers at risk in many countries. In the two years since, the composite price for coffee has been in continuous decline, from $1.390 per pound in January 2017 to 1.104 US cents per pound in June 2018.

How Did We Get Here?

How did we get here? The reasons are many, and beyond the scope of this one article, but clearly there is a structural basis for a drop in prices. Record production of 172 million bags globally, up 12 million bags in a single year, has been driven primarily by Brazil and the reality that even with low market prices, the deflated Brazilian real converts to good value for Brazilian producers. Record-setting levels of speculation and industry consolidation among buyers are factors, as well.

Marco Tulio Lozano leads quality control and grading operations for COMSA, a cooperative in Honduras. Photo courtesy of Fair Trade USA.

What’s going on here? How can it be that the reality of coffee in consuming markets is so starkly divergent from the reality of coffee at origin? Something’s clearly rotten in Denmark (and Oakland, Seattle, London, Tokyo and Melbourne, too). While a number of industry leaders are pioneering pricing mechanisms that don’t rely on the New York C, the vast majority of coffee — even the “sustainable” options — use the market as the basis for price determination. On the one hand, coffee is being roasted and sold as less of a commodity every day, and simultaneously, on the other side, coffee is being bought at origin just like the commodity it’s always been.  

Producers are paying heavily: Debt is piling up; income is drying up; food insecurity is right around the corner. Farmers are mortgaging their farms, cutting spending on education and health care, and skipping meals. They are subsidizing your coffee with their modest wealth at best, and increasingly, their ability to withstand poverty.

Catarina, a technician for one of FECCEG’s base level cooperatives (El Renacimiento), supports 66 members in best practices for fertilizing, including training members in starting and maintaining vermiculture on farm. Photo courtesy of Fair Trade USA.

Perspectives from Origin

In an effort to make room for coffee producers to speak directly to the industry, we reached out to a number of our partners at origin. Here are some of the things our sources told us.

From Lucas Silvestre, general manager at GUAYA’B, Guatemala:

What is happening with prices in the international market is like the final blow for small producers. They rely heavily on income from coffee production. With prices below $100, production costs are not covered and because of that, there is a risk they must sell their farms to cover family expenses and pay interest on loans.

From Rodolfo Peñalba, general manager at COMSA, Honduras

It is hard to believe that the price of coffee barely reaches $1 per pound. Producers are worried, disappointed and frustrated, because with this price, their hopes die. They cannot cover their debts and, therefore, cannot obtain other debts to cover the urgent family needs and the maintenance expenses of the farms. Coffee represents a high risk in the New York stock market, the main market for Arabica. No producer can operate with current prices, as this will cause serious difficulties in the sustainability of their farms.

From Juan Francisco González, general manager at FECCEG, Guatemala 

I believe that we must accept that the coffee industry is in crisis. For years now, smallholder farmers and their cooperatives have been making efforts to revitalize coffee production as a sustainable way of life for producers and their families. All our efforts are minimized in the face of the threats of climate change, the effects of international prices and the ownership of land, among other externalities that make producers look for new forms of survival. One of them is internal and external migration. Current prices do not encourage young people to continue in agriculture. This will affect coffee production in 20 years, when current generations leave coffee growing as the main economic activity. 

What’s Next?

What’s next for the coffee market? It’s possible that unseasonably dry weather in Brazil could impact production, and if that happens, a massive exodus of speculative buyers could trigger a rapid correction in the market. But it’s just as likely that Brazil’s production continues to hold traction, and the market stays at crisis levels, with potential to drop even further. And if it does, even with the laudable efforts of so many models to achieve sustainability, the coffee industry’s collective reliance on the C — still the foundation of the majority of coffee transactions — is mortgaging coffee’s future.

This is a bleak picture, but the power to change this is in our collective hands. There’s a small but meaningful trend in buying models establishing alternatives to the C as a pricing mechanism: Coop Coffees, Kickapoo, Transparent Trade Coffee, Fair Trade Certification, to name a few.

Here’s a quick guide to confronting the coffee price crisis:

Educate Yourself and Others 

Do your research and understand the issues beyond the surface level. A range of individuals and organizations have already dived deep into the topic of pricing, here’s a few to get you started:

1. SCA white papers (almost all mention the importance of pricing in some way)
2. Symposium lectures (Kim Elena Ionescu’s talk on myths relating to quality/pricing, etc.)
3. Cost of sustainable production (SCA lectures, FTUSA research, others)

Leverage alternative models

1. Collaborative initiatives (Transparent Trade, Coop Coffees)
2. Learn from those who have established their own price floors/transparency models (Counter Culture, Olympia Coffee, 49th Parallel Coffee Roasters, etc.)
3. Certifications with price floors (Fair Trade Certification, for example)

Talk with your suppliers

1. Ideally speak directly with the producer and learn what price is sustainable in the long term?
2. Get in touch with your importer and ask how much of the final price gets back to the producers you source from. Push for transparency, and make sure that the additional pricing you pay actually makes it back to producers

For years coffee has been seen as a leader and model for other commodities seeking to make moves forward in sustainability. This means our actions and innovations have the potential to improve lives not just for the tens of millions of coffee producers, but for many others as well.

Overall there’s plenty of opportunity and resources to support change. The present size of our industry stands at $200 billion globally, and yet only 10 percent of this staggering sum stays in producing countries, according to the 2018 Coffee Barometer. Tackling the issue of sustainable pricing will take time, a number of solutions and a wide range of players, but through collaboration we can build a more sustainable and equitable world of coffee, one that escapes the cyclical boom and bust nature of the C Market.