The benefits from rising prices today maybe destroyed by the next calamity tomorrow.
It is not uncommon knowledge that the bulk of the profits in the coffee industry, have traditionally been usurped by Coffee Roasters who typically keep sufficient stock and supply through futures markets. However, this has been unstable too because of various reasons including stocking up by producers. The bottom line is that farmers must have a sustainable production that is based on realistic prices for their crop.
Arabica coffee is the world benchmark for coffee futures contracts that trade on the Inter Continental Exchange (ICE). Arabica accounts for 75 percent of the world’s production and is mostly cultivated in Brazil (40% of the world’s total supply) and Colombia. Robusta accounts for the remaining 25% and is mostly produced in Vietnam (15% of global supply) and Indonesia. Other major exporters include: Peru, India, Uganda, Ethiopia, Mexico and Cote Ivoire. Robusta is the coffee bean that is popular in Europe and instant coffees, while Arabica beans are popular in the United States.
The prices have been extremely volatile. Trends are shown below:
10 Year Trend
1 Year Trend
1 Month Trend
1 Week Trend
Graph Source: https://tradingeconomics.com/commodity/coffee
Understanding the intricacies of the price movement requires expert analysis. However the general reasons for the volatility can be attributed to lower annual crop in Brazil, higher percentage of crop buyout (futures), stocking of inventories by producers amongst other reasons.
Robusta production and price trends are quite different from Arabica. Vietnam is the #1 Robusta coffee producer. A severe drought followed by heavy rains harmed the world’s largest reserves of robusta. The concerns over the crop were reflected in a characteristically erratic movement in the often volatile coffee market. The scarcity of suitable lands will likely reduce Arabica production and push up the price of Robusta, which will become increasingly indispensable. This is reflected in the chart below:
The situation in India and more particularly Kodagu is even more difficult to track. In India, Robusta accounts for +70% of total production – the reasons for which can be the cause for another analysis. The obvious reason being that Robusta is more hardy to maintain with lower operating costs.
Quite strangely monitoring or getting coffee price quotes is a nightmare. In Kodagu, traders quote markedly different prices in Virajpet, Siddapur, Somwarpet and Madikeri, which is distinctly different from Sakleshpur. Weekly fluctuations are volatile given that the beans move to the border of Kerala, further consolidated by local agglomerating traders and finally reaching Calicut from where it is exported. The margins made by these traders can be substantial leading to increased speculation, stock holding, shipment schedules leading to unpredictable price behaviour.
Some additional value adding information: In Vietnam and also in South America, intercropping beyond pepper with fruit trees are being encouraged to counter the volatility of Coffee prices and also climatic conditions. Shade canopies are back in vogue to protect the plants as also to retain moisture in the soil.
There is a niche segment of “specialty” varieties of coffee that command huge premium but requires expertise at a different level. A comparable analogy is wine making – there is a lot to learn from viticulture.
We will be separately posting a good down-to-earth article on this subject written by Emmanuel Dias, shortly.
The research desk has sourced some of the information from tradingeconomics.com and other leading media sources.
Readers and Experts views are most welcome. Kindly respond to the articles with your comments.
I am a great fan of all things from Coorg – the people, produce, customs, sport and of course being from Punjab – we have so much in common. I always look forward to such articles through Coffeeland Online.
I read both the articles with great interest as everyone knows that two of the most famous brands of Coffee – iIli and Lavazza (there are perhaps twenty more iconic brands) are from Italy. The Italians have over decades mastered the art of Roasting and creaming the profits from their sale of branded coffee.
I could argue that mere branding is not everything. The number of viable neighbourhood cafes that exist across Europe are dime a dozen. But during a recent visit to Coorg there were virtually no good small artisanal cafes. The most prominent brand is Ainmane run by an enterprising Kodava where he sells very good coffee as well as other local produce. Big Cup in Madikeri is another exception and it is run by a non-Coorg – good for them.
So how does one motivate my Kodava friends to tap this market opportunity which is ideally suited for Smaller and Marginal Farmers. A sense of entrepreneurial encouragement is required with no substitute for hard work. After all, running a coffee plantation is a seasonal activity and while it provides a “good life”, one has to earn the means to lead such a life by augmenting income. We Sardars showed the way for dignity of labour and purposeful enterprise. Add Value to Coorg Coffee and other produce – it is the rare shade grown coffee in the world with unique flavours, lovely environment and a great story!!
Both the articles are very well written with good information on price movements, plausible reasons for the farmers losing out on better prices and how planters should augment their income through inter-cropping and diversification. The need of the hour is for the farmers to reinvent themselves by adding value to their crops – be it Coffee, Pepper, Cardamom, Spices, Fruits …..
When I was driving past to Madikeri I found many traditional small traders with their godowns mostly empty, in stark contrast to the past years. His lament was that the Planters are not parting with their current year’s crop as they have got wise to the rising prices.
While this is a good trend, it is equally important for the Small Growers to learn financial discipline and not live beyond their means. The right thing to do is to augment their farm income by setting up Coffee Shops (even small mobile vans). One encounters a lot of unemployed youngsters who could augment or even earn a basic livelihood especially given the opportunity provided by the hordes of tourists.
It is a fact that the income generated by the Planters is largely captured by the traders and small businesses from across the border.
Invaluable insights on pricing that is normally outside the reach of the planter’s understanding. Keeping track of prices in Kodagu is a real challenge – it borders on being whimsical. Pre-exports, it appears that the Traders make the margins at the expense of the grower.
However, I would still like to understand whether the volatility of prices of coffee affects the pricing of cups of coffee in the cafes/coffee shop. The relative cost of the coffee powder in a cup of coffee is so minuscule that most small entrepreneurs don’t get affected.
In the context of Kodagu, the need of the hour is for small inexpensive cafes to be set up across the district where a good cup of coffee or any beverage for that matter, can be got – the margins are humongous. The infrastructure can be modest, but cleanliness should be ensured. After all we were all exposed to the small chai kadas in our college days and without exception, the owners made handsome surpluses to sustain everyday livelihood and also put aside some savings for growth and for a rainy day.
This would supplement crop based income with a steady source of earnings – especially given the growing tourist flow. This is ideally suited for the planters with small holdings and with their properties touching the roadside.
Mandappa’s comments ring a bell to what I saw In Colombia. Bogota is dotted with numerous cafes – inexpensive and a good meeting place for all age groups. The emphasis is on serving all variants of COFFEE. The idea is for Colombia to consume much of its own produce and replace soft drinks like Coke and Pepsi – which is now well established as a harmful drink in the guise of refreshment.
Decades ago the growers and exporters of coffee were subject to unscrupulous and suspect quality evaluations by European buyers and the value of the shipment was downgraded. The drive for local consumption was launched with great success. A systematic Barista training program was introduced and many unemployed youth were trained to become Baristas. Something for the Indian Coffee Board to emulate under the dynamic leadership of the present CEO Dr Jagadeesha. They already have something rolling out on this front.
In many cities across the world it is not uncommon to see small neighbourhood coffee shops. New York is a great example of many such friendly neighbourhood shops.
My assessment is that expensive outlets like Starbucks will find it difficult to survive in a cost conscious market – even in cities like Bangalore. The ubiquitous Tea Shops of Kolkata or for that matter those dotted across the South will work – with a substantial focus on hygiene, cleanliness and quality of course!
There are lots of very interesting points in both the articles – thank you for posting them. I was particularly struck by the fact that we were always told that the price for Arabica coffee was much higher than that if Robusta. The price gap looks like it is narrowing down and to that extent the planters in Kodagu will not feel disheartened as in the earlier years.
There is a need for definitely realising better valuation through intercropping. The Vietnamese seem to have mastered this more than others with Pepper and Durian. If the cost of operations can be sustained in this manner, the planter can hold the stock of coffee and trade at an optimal price.
There are other aspects that need to be studied for improving the financial stability of running plantations:
– cost of cultivation
– ”outturn” maximization – an area where the Trader keeps a margin
– specialty coffees – an entirely new area for discontinuous value creation