Canadian Vending

Features Coffee Service
Coffee trends: July-August 2010

Pay It Forward


August 18, 2010
By Brian Martell

Topics

Every once in a while the ICE goes a little crazy. I’m not talking
about the big ’berg that recently slid off of the Greenland ice shelf,
I’m referring to the InterContinental Exchange.

Every once in a while the ICE goes a little crazy. I’m not talking about the big ’berg that recently slid off of the Greenland ice shelf, I’m referring to the InterContinental Exchange. For those of you who have been in the coffee biz via OCS or vending for a few years, you’ll fondly remember the old CSCE (Coffee Sugar and Cocoa Exchange) on the NYBOT (New York Board of Trade).

This was the market that determined the price for washed Arabica coffees for the world.  It was one of the last “pit” exchanges in the western world with men in white collared shirts jumping up and down yelling and waving pieces of paper while slamming down a cocktail of Maalox and heart medications. To watch the CSCE in action was to witness a scene out of Trading Places with Eddie Murphy.

About three years ago the CSCE was quietly replaced by the more modern ICE.  These days, the only noise traders hear is the hum of their terminals as they place puts and calls and watch simultaneously what every other trader is up to.  Gone is the glitz and the drama, but here to stay is a much more transparent and efficient exchange that opens in our wee hours of the morning with the markets in London (UK) and closes New York time at 2 p.m.

Advertisment

In the past two years, we have seen some anomalies that have not been part of the coffee reality for at least the last two decades. Differentials have gone wild for good quality coffees, while the market price has remained relatively unscathed. In the last month, however, the market decided it was time to ride the escalator up and in less than three weeks of trading, we saw the “C” (as it is commonly referred to on the ICE in reference to Central American coffees) price gain almost 35 cents or a whopping 20 per cent increase.

Roasters were caught flat-footed as most were looking for a decrease based on reports that green coffee production was headed for a bumper crop. There was so much certainty in that regard that the Brazilian government was poised to buy large quantities (in the millions of bags) of home grown production just to keep the market from falling. As soon as the technical buyers stepped into the ring, the ministry of agriculture in Brasilia stepped back; the price had gone too high for them to consider bolstering their own market.

The technical buyers are those that buy and sell coffee with absolutely no intention of roasting it. They make up over 60 per cent of all coffee trades coming from what we, in the roasting business, affectionately call speculators.

The domino effect this causes is easy to foresee; speculators turn to soft commodities because they “feel” they are undervalued. The prices are reflected on the market and the companies that make shirts, squeeze oranges or roast coffee end up paying more for the raw materials they buy. As the old saying goes, “a rising tide raises all boats evenly,” so industry producers raise prices to the wholesalers who in turn raise prices with the consumers who complain that the prices are too high for their tailored shirts or lattes as they go on their way to work as commodity traders.

Of late OCS and Vending operators have seen coffee prices going up from roasters based on the above factors. And while it doesn’t make the pain of an increase any less easy to bear, at least there is some twisted reason for the pain. 

In defence of commodity traders, perhaps the greatest spike in coffee prices over the last two years did come from a fundamental shift in supply; the Colombian crop decline. Technical spikes in price do not usually have staying power; once the price has been driven up to a certain level, the traders have automatic set selling levels which cause the market prices to fall once these levels are achieved. These gyrations are irritating to the actual consumers of commodity contracts, but a fundamental price shift has the effect of either moving the market to new plateaus or sinking them for a much longer time than a technical shift would be able to sustain.

Colombia has always held the position of the world’s first producer of washed Arabican coffee, the world’s second producer of all Arabica coffees (Brazil is first) and the third overall producer of all types of coffees after Vietnam. Colombia’s crop decline has maintained higher than usual differentials for their coffees with no abatement in sight. It has also had the effect of driving up other good quality washed Arabica coffees in the region as roasters start to substitute Colombians out for other similar coffees.

As coffee prices are more important to us than conversational fodder at a cocktail party, it is important to know why they always seem to be changing. The ability of roasters or commodity traders to predict where the market will go to, however, is as good as their ability to predict if 26 will hit on the roulette wheel. Putting price increases through always leaves suppliers feeling vulnerable to competitive forces, but those forces are living within the same market conditions.
 
Questions or comments? Visit Brian at www.heritage-coffee.com .


Print this page

Related



Leave a Reply

Your email address will not be published. Required fields are marked *

*