Yesterday, coffee futures closed on the NY Stock Exchange at 246.75 US$/100lb. At the beginning of November, the price was 208 US$/100lb, and yesterday, 07/12/2021, it reached its highest value in 2021: 252.33 US$/100lb. For some, a reason for concern; for others, a reason to celebrate.
This article is a guest post by Kleber Cruz. Kleber works for GEPA in Germany, and we highly value his immense knowledge and overview of the coffee market.
Given the current market situation, I believe it is more important than ever to cultivate connections with cooperatives more intensely. This is particularly crucial for those who buy directly from producers or cooperatives. Because, even if one does not want it to happen, they are at risk of falling between the cracks, especially now in Central America, where the harvest is in full swing and trade relations are being heavily influenced by liquidity problems, container shortages, and, above all, price fluctuations. Phases of high prices last a few months (between 3 and 7, apart from 2010-2012, when roya severely damaged coffee plots) and were mostly related to drought or frost in Brazil. Phases of low prices last for years. The last time this happened was in 2014, when coffee prices were above the magic mark of 200 US$/100lb, and that was only for a short time. In the following years (2015 – 2020), average coffee prices moved between 131 US$/100lb and 111 US$/100lb. At such a price level, it is impossible by any stretch of the imagination to run a sustainable coffee farm; the need for producers to catch up on quality of life is immense.
Coffee chart from December 10, 2021, by finanzen.ch
Fluctuating prices, container shortages, and liquidity bottlenecks are not a pleasant prospect for many organizations, especially because they know from the past that the identification of producers is put to a severe test during such times.
In Central America, the harvest started a long time ago, and local prices are in some cases higher than world market prices. Buyers, so-called coyotes of all sizes, compete with cooperatives for the farmers' coffee. The coyote even goes to the farmer's front door and buys all the parchment coffee without any quality control, documentation, or similar requirements. He buys without any effort for the producers. He pays cash, and his prices are often slightly higher than those of the cooperatives.
Cooperatives set the purchase price for coffee at a general or delegate meeting. Some cooperatives pay in two installments: first upon purchase and then a final payment months later. Other organizations pay a quality premium; often, cooperatives have to adjust their prices to match the coyotes' just to get the parchment from the farmers. Being organized in a cooperative means work: The farmer must contribute to the life of the organization, he must deliver good quality to the cooperative (for which he receives a better price), he must carry out the tasks for organic certification and other quality seals, and if he also supplies micro-lots, that naturally costs even more time and effort. All of this is eliminated when selling to a coyote.
Especially when prices have risen as they have in recent months and the producers' need for better quality of life is immense, the temptation to sell coffee to the coyotes is great. And indeed, some farmers decide to do just that. They sell to the coyotes. Faced with good prices, they themselves also become coyotes or buyers of coffee from relatives, neighbors, or other acquaintances who do not belong to the cooperatives, and pass this coffee off as their own to the cooperative whenever possible.
In this competition between cooperatives and coyotes, the cooperatives do not walk away empty-handed; they simply do not get the quantity they need to fulfill contracts and thus achieve good prices. And precisely this point tempts many coffee cooperatives to become coyotes themselves, i.e., to buy coffee from non-members.
Especially when prices are as high as they are currently, the temptation is very great for some cooperatives to procure coffee on local markets without any certification to stretch existing qualities, fulfill existing contracts, and be able to sell even higher volumes. Whether this is right or wrong is a matter of debate. Such developments are only possible if coffee farmers have not received a fair price for their coffee for years.
