Market Reports

The effect of rising coffee commodity market prices

International Coffee Organization

Previous International Coffee Organization Executive Director José Sette discusses the global impacts of rising coffee commodity market prices and how resilient and productive producers will benefit. 

In its March 2022 market report, the International Coffee Organization (ICO) stated that its composite indicator of coffee prices averaged 194.78 US cents per pound in March.

This is a fall of 7.6 per cent in comparison with the previous month, breaking a streak of 17 consecutive months of increases, a significant trend according to past ICO Executive Director José Sette.

“From 2016 to 2020, C market prices dropped, causing a lot of remuneration issues for coffee growers. These price levels were simply unsustainable in the long term, so this is a welcome respite,” Sette says.

He says coffee farmers with high productivity and resilience will be the main beneficiaries of current market prices.

“Now that the C market price has increased steadily over the past two years, this is driving better income for farmers and players in the supply chain at origin, especially with rising input costs and increased fertiliser expenses due to global export restrictions,” says Sette.

“Growers with lower productivity should take advantage of these prices to invest in their farm management practices and become more productive, otherwise they will remain vulnerable if and when the current price trend reverses.”

Sette says as an industry, the specialty coffee fraternity has been passionate about decoupling the prices farmers receive from the C market and de-commoditising the product so that they can be rewarded fairly for the quality of the crop they produce.

However, while the specialty coffee industry pays a premium for high quality beans, the constant drag of a low C market price on the bulk of coffee produced has meant limited profits for smallholder farmers.

Sette adds that if the price rises are sustained, it will contribute to a more sustainable coffee sector.

“We must remember that coffee is a labour-intensive crop and in many producing countries there is very little mechanisation. We still depend a lot on manual labour. We must take advantage of these up swings in prices to increase productivity and move forward looking to the future.”

Sette believes there are three main factors responsible for the market price rise.

The first, is the cumulative effect of low prices that has discouraged the expansion of plantations and resulted in low crop maintenance and reduced use of fertilisers. This has a negative impact on general availability and occasionally quality.

The second factor is the COVID-19 pandemic. In one sense, Sette says it has dampened demand because the out-of-home consumption has fallen quite steeply. On the other hand, it has had a significant effect in terms of disrupting logistics and to a lesser extent, post-harvest operations. This has not yet been fully dealt with, which is contributing to retained prices high.

The third factor, Sette says, is adverse climate events, evident by the 2021 Brazil frost, which delivered a damaging blow to coffee trees in the coffee growing region of Minas Gerais, ruining ready to harvest cherries, and harming prospects for this year’s Brazil crop.

To offset this price rises, Sette says interventions to stabilise futures market prices are not politically or financially viable in today’s environment. In this context, he believes the futures markets remain the best way to adjust prices to changing market conditions.

“That is not to say improvements cannot be made. For example, to ensure long-term, profitable incomes, farmers need support establishing long-lasting market connections, developing climate-resilient growing techniques, and diversifying their incomes,” he says.

“One of the best ways to help coffee farmers increase their revenues is to work with them to enhance the quality and yields of their coffee while promoting value chain improvements that enable farmers to earn a larger share of export prices.”

In addition, Sette says climate-smart agricultural practices, such as planting shade trees and developing water catchment systems, help farmers withstand such threats, improve farm productivity, and reduce their own environmental impact.

“Moreover, growing crops besides coffee can increase food security and reduce environmental degradation. Intercropping, the process of planting multiple crops on the same piece of land, has both environmental and economic benefits for farmers,” he says.

“Coffee can flourish under the shade of banana trees, which provide protection from the harsh sun, sequester carbon, and reduce soil erosion. A variety of crops provides farmers with important sources of cash at different times of the year when coffee crops are off-season.”

To help alleviate the effects of market price fluctuations, the ICO has helped create the Coffee Public-Private Task Force, an initiative to increase public-private collaboration to achieve a prosperous, sustainable, and inclusive coffee sector.

“We’re particularly proud of the work we’re doing to establish living income benchmarks and pilot projects to identify living income gaps and close them, aiming for prosperous income for farmers,” says Sette.

“We’re also trying to promote market transparency, which is part of our mission to provide world class statistics to the world coffee sector.”

This taskforce builds on both the ICO intergovernmental structure as well as the established networks of the World Coffee Producers Forum, Global Coffee Platform and the Sustainable Coffee Challenge.

While Sette says prices are likely to stay high in the near future, it’s difficult to predict how market prices will fair in the uncertain times we’re living in.

“On 23 February, our composite indicator price was around 211 cents per pound. Now it’s about 194, which is a drop of about eight per cent. On 24 February, the day the conflict in Eastern Europe broke out, futures market prices fell by about 3 per cent. That was the largest decrease since July 2021 when the market was already very volatile after the Brazil frost. So we really don’t know in which direction prices are headed,” Sette says.

“The extent of the impacts we’re facing in terms of price rises will depend on how long the conflict in Eastern Europe lasts. The longer it lasts, the greater the impact on coffee and the world economy.”

Sette says while he believes volatility and upward pressure on prices does cause difficulties, such as rising labour, material and shipping costs, it’s better for prices to rise than fall for the long-term sustainability of the industry.

“While it brings with it its own issues, overall, I think we have to view the price rises in a positive light, because the main beneficiaries, the coffee farmers, are the base of the value chain and we need to keep them sustained.”

For more information, visit www.ico.org

This article was first published in the May/June 2022 edition of Global Coffee Report. Read more HERE.

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