Lessons learned from soaring coffee prices

Over the past few months, navigating a VERY volatile market, soaring prices, and their effects on the supply chain has been quite the learning curve for us. At times, if we’re honest, it’s felt like we’ve been stumbling around in the dark - a feeling we’re sure many of you can relate to. There’s an overwhelming amount of information out there, and we’ve only just begun to scratch the surface ourselves.

Rather than adding to the noise with more facts and stats, we feel it’s time to share our perspective. Our silence so far has stemmed, quite simply, from inexperience with market fluctuations like these and a desire to fully understand their impact on everyone in the supply chain. Now, however, it’s time we offer our thoughts.

Let’s start by busting some myths

Saying that "we work outside of the market" and “our prices aren’t market-driven” has always been something we hang our hat on; we’ve prided ourselves on it. 

…We have now realised that’s not true. 

The reality is that both the global coffee market and government policies play a huge role in every producing country we work with. No one, including us, can escape their influence. What truly matters is how we respond.

We’re not coffee traders. We’re not among the speculators who never take physical delivery of coffee yet trade on it daily. Instead, we are in the thick of it, working to understand how price fluctuations affect the livelihoods of everyone in the supply chain. Yes, we are part of the market - but our primary focus has always been, and will continue to be, the wellbeing of the people within it.

Who are the winners and losers currently?

It’s important to recognise that these rising prices do benefit someone: the coffee producers. Ilya Byzov, Head of Research and Quant Trading at Sucafina, featured in an episode of the Buying Season podcast - Trouble on the high C - recently, stated: “There’s definitely a winner here, and that’s the farmer.”

However, while farmers and producers are coming up with the goods, who’s able to buy them? The simple fact is, when farmers/producers start to do well, those at the buying end - importers, roasters, consumers - panic. This shouldn’t be the case - it should be a time of celebration for the entire industry. The current climate is exposing some deep flaws, especially when it comes to speculation.

The huge impact of speculators

Speculators are essentially market players who never physically handle coffee, but profit from any price fluctuations. In his recent interview on the Buying Season podcast, Byzov stated: “About a third to 40% of the coffee futures contracts that are being traded are not traded by anyone who takes physical delivery of coffee.”

It’s shocking when you look at it like that. But those in the middle of this trading “game” are having major impacts on the industry as a whole. Coffee is becoming - well, it’s become - another commodity for investment and hedging.

Here’s how it all works, in a nutshell: speculators buy before roasters do, often because roasters are holding back due to high prices. By the time roasters realise they need to buy stock for the next six months, speculators have already secured their prices. When roasters are finally forced to buy at a premium, the market rises again - just in time for speculators to cash out, leaving the entire industry scrambling.

It's an absolute mess, and not something we can solve overnight… but what we can do is present an idea for the future sustainability of coffee.

How we are adapting

The fact of the matter is, we are in this market - that’s unavoidable. But what it has allowed us to do is understand the industry a lot better and rethink how we operate.

Something we never thought we’d need to do is look at risk management strategies, including purchasing insurance options - something that protects us if the market comes crashing down. Yet, that’s now our reality, and over the last few weeks we’ve started looking at each of these for our Uganda coffees, which, unlike many of our fixed term coffees, are hedged against the market.

So, what’s the solution? Let’s look at our Zambian partnership as a model

There seem to be a few options that spring to mind when it comes to finding a way out of the current chaos…

One of course is to continue as best we can until the storm passes, perhaps with roasters increasing consumer prices temporarily - but that brings immense risks for many, with no real timeline in mind.

For us, the best solution is longer-term contracts from both producers and roasters.The more contracts booked in advance at stable prices, the more we can remove ourselves from the market. Likewise, the further out we purchase means we can keep these contracts off the exchange and away from the speculation.

We've started to buy coffee from Mount Sunzu in Zambia, because it offered us a different way of working and essentially allowed us to secure prices for the next three years. This model provides predictability and security for both producers and buyers.

We’d love to replicate this with other partners… indeed, we touched on the possibility of doing just that in Ethiopia in our last blog - which you can read here.

If roasters could follow suit and fix their prices longer-term, it’s a win-win. By looking long-term, we’re minimising short-term price volatility impacts and creating a much more sustainable supply chain for all involved.

Of course, different countries face unique challenges - from government regulations to agricultural conditions. But, where possible, we believe long-term contracts are the way forward.

We've then got to ignore what the market does - which we know is the difficult part. Because if you're saying you're going to pay £6.50 a kilo, but the market is saying it's £3.50 a kilo base price, we can't be then going actually, let’s change it again - jumping around. True stability means riding out the highs and lows with a long-term vision in mind.

Will you join us?

We’re calling out to all our roasting partners to get in touch with us if you agree with our approach and would be interested in discussing it further. We truly believe longer-term contracts are the answer for more security and stability throughout the supply chain. 

Our desire is to move away from the current market system and focus on fair prices for all stakeholders, prioritising long-term contracts for stability.