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Reflections In A Cup: What’s Your Price?

What’s Your Price?


June 10, 2008
By Stuart Daw

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The coffee service panel at the recent NAMA show in Atlanta covered
many aspects of the business. But one question from the floor that
particularly caught my attention had was, “What should the right price
for green coffee be?” It was aimed at finding an answer amid the
current confusion, the immediate cause of which was the publicity
surrounding hurricane Katrina and the probable loss of a lot of green
coffee stored in New Orleans.

The coffee service panel at the recent NAMA show in Atlanta covered many aspects of the business. But one question from the floor that particularly caught my attention had was, “What should the right price for green coffee be?” It was aimed at finding an answer amid the current confusion, the immediate cause of which was the publicity surrounding hurricane Katrina and the probable loss of a lot of green coffee stored in New Orleans.

The market had already been rising before Katrina and the question was timely, for there was much public outrage over the “obscene windfall profits” being made by oil companies, a rage given an extra boost by the media and some demagogues in Congress. The panelist, in attempting to answer, may have sounded evasive, so the questioner insisted on some finite number. The answer came out, “$1.15 per pound.”
 
But actually the panelist would have been better off avoiding a specific number, for there is no such thing. The only proper answer in the long run is the philosophic one: the market and the laws of supply and demand.

But in the short run some strange things may happen to green costs. The speculators, those traders who never actually touch coffee, make a living trying to guess where the overall market is headed based not only on the fundamentals of supply and demand, but on a wild array of charts and curves that seem to the lay person to have no connection to actual coffee beans. And speculators are taking a macro view of the entire market for arabica and robusta coffees regardless of origin, age, or relative quality. Their only concern: is the market about to rise or fall on the New York Board of Trade index?  An amazing amount of money is being gambled every day by traders trying to discover the answer in a maze of longs and shorts, puts and calls.
 
For coffee growers in the countries of origin, the correct price is what it should always be: what a willing buyer agrees to pay to a willing seller. Any attempt by well-meaning individuals or groups to artificially change that equation is, in the long run, wasted. But for the OCS or vending operator at the NAMA convention, what was really meant by the question was, “Is my price going to rise or fall, and when, and how do I know if I am getting treated right by my supplier?”
 
The correct answer is to be found in a proper relationship between roaster and customer, one in which the customer knows the markup over roasted cost of his product(s): what are the components of the blends; the shrinkage factors; and how much inventory the roaster normally carries for his customers’ protection.
 
To keep green cost changes in perspective, between November 24, 2003 and March 18, 2005, the dates of the recent lows and highs covering about 16 months’ time, the market rose by US 80.6 cents per pound (CDN 98.3), which is CDN 1.176 per pound roasted, given a 16 per cent average shrinkage. Then how come your price never rose by that amount? For the simple reason that your roaster’s average green cost never was at the low or the high. His purchases are spread over a continuum of time, with the average blend costs moving gradually, and usually only slightly up or down with each purchase.
 
No one can be lucky enough to always buy at the low, or unlucky enough to always be at the high. And there may be a lag of three months or more from the time the coffee was bought and the time it arrives.
 
A nightmare for the roaster comes when he sends out a letter announcing a price increase based on the average cost of new arrivals of green coffee ordered three months ago, and his letter arrives the day after the market has just dropped three cents. The buyer opens a notice of increase when he expects a decrease. And so very often the roaster simply tears up the letter before sending it, meaning he has to eat the higher green cost. He finds it just too difficult to stand on his head and preach a sermon on coffee economics to the customer.
 
Today’s market (November 14, 2005) is just above the middle of the aforementioned range, and if by some miracle it stayed there, your net increase over the lows of November 2003 should be around 60 cents per pound, while making some allowance for unusual circumstances such as the tsunami that hit Sumatra, driving coffee from that country well beyond its normal relationship to the NYBOT “C” Contract price.

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So when you pick up the newspaper and see that the price of green coffee fell two cents yesterday, you shouldn’t run to the telephone to demand an immediate price decrease. Don’t expect your roaster to affect rapid changes, knee-jerking weekly to the latest market fluctuation. He is, after all, not just your roaster; he is also your procurement officer, watching market conditions on your behalf. And if your volume is high enough to warrant it, he may be happy to let you decide how long a market position you wish to take based on some hunch or need you may have, and to cover himself accordingly.

And lastly, remember that the roaster’s margin is smaller than that of any class of customer he serves, and the lower the margin, the less anyone in any facet of the coffee business should gamble on the future. Thus, at whatever level the market is at a given time, the roaster, to survive in the long run, is wise to buy for his customers’ needs and not gamble the farm in hope of a quick gain.

For any questions the reader may have on the above, contact the author at stuartdaw@aol.com, or get a regular market update on our website: www.heritage-coffee.com.