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The Lowest Coffee Price in a Decade

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Note: I’m back! A year-long PhD-thesis-writing, 4-classes-teaching, sleep-deprived hiatus later, I’m back to comment on pressing issues in food policy and governance as they come my way. First up: a topic dear to my heart – the recurrence of abysmally low coffee prices.

This week, coffee Twitter was all up in arms. Futures prices for Arabica coffee had just hit historical lows, yet again, dropping below 1$/pound. This marked the lowest price in a decade.

The reasons for these low prices are mixed: according to the cursory research that I did, it may be due to a combination of record output levels by Brazil, a soft Real (making Brazilian coffee even cheaper on the world market), relatively high stocks remaining, and significant speculation in the stock market as the stock is seeing above-average volatility.

In response, those in the coffee community concerned about sustainability raised serious, and valid, questions. What will this do to smallholder farmers who are already making struggling to meet their expenses? Using best available data, it is almost certain that all but the most progressive farmers will make losses in this price climate, as the following Tweet shows.

Yet, others noted that not all origins would be affected the same way, given that farm-gate prices depend not only on the stock market price (calculated in US dollars), but numerous other factors, including the exchange rate of the local currency to US$.

Indeed, a paper I am presenting on Saturday at the European Consortium for Political Research’s conference shows that at the farm-level, price volatility depends strongly on exchange rates among other factors. Note that in the graph below, which shows data from Colombia, the US$ price (the bottom time series) sinks between 2014 and 2015 – mirroring the dip we can see above. However, the Colombian peso price (on the top) remains constant due to a simultaneous devaluation of the peso versus the dollar. This however also meant that all imports, including farm inputs, became more expensive for Colombians, creating a difficult trade-off.

from: Grabs, 2017

The dip in price also rekindled a discussion on whether voluntary sustainability standards such as certifications can address this problem, with differences in levels of optimism:

Indeed, whether the minimum price guarantee (which is currently set at $1.40 per pound, plus a $0.20 social premium) implemented by Fairtrade actually makes a difference to farmers has been a topic of much debate and research – including ours! We come to equally divisive conclusions in our cross-country analysis. While in some instances (such as Honduras) we find large differences in farm-gate price between Fairtrade and conventional cooperatives, in other instances such as Costa Rica or Colombia (as pictured above) we find few distinctions. As you can see in the image above, the price difference between certified and non-certified coffees in this one cooperative was barely perceptible, with week-to-week volatility making a much larger difference.

However, this was also due to the fact that many Fairtrade cooperatives are unable to sell their entire production to Fairtrade conditions, with many buyers switching to other certifications (without minimum price guarantee) or to conventional coffee when prices sink. It will be an interesting case study to watch how Fairtrade sales will react during this time of crisis.

On the other hand, this problem also shows how important domestic institutions continue to be in the agricultural sector. The Colombian National Coffee Growers’ Federation already assured their constituents that they will be meeting with relevant ministries next week in order to address potential measures such as input subsidies or debt relief, given that they consider current prices at 40% below what they would consider to be a viable and profitable price for farmer:

Countries without such robust institutions, on the other hand, will feel the brunt of the low market prices direly. In my thesis, I show how Honduras, for instance, passes market price volatility onto producers much more directly than Costa Rica or Colombia do. Here, agricultural policy can – and does – make an immense difference in producers’ livelihoods; likely even more than market-driven mechanisms are able to achieve.

However, in the end this situation is just another repetition of a cycle that is as old as the coffee sector (and indeed, most commodity production): the liberalized production of a good in multiple countries – with different production costs and institutional support – in response to an instant of high prices (e.g. 2016) will lead to oversupply and long periods of low prices, in which the large majority of producers will acutely suffer. If you ask me, it might be time again for a new commodity agreement that allows countries to coordinate their production levels and align them more effectively with demand, akin to previous efforts in coffee from the 1960s onward. Until that happens, though, it’s every country (and its farmers) for its own. 🙁

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