The recent green coffee market volatility can create a daunting situation for actors throughout the coffee supply chain. On the surface, rising prices are a good sign for farmer incomes, but the reality is that a rapid increase and volatility may make the situation more difficult for many cooperatives and smallholder producers in the longer term.
When C-market prices are historically low — as they had been throughout much of 2018, 2019 and 2020 — they can be expected to move back upward. Yet such volatility tends to cause actors throughout the supply chain — including roasters, importers, exporters, and producers — to counter with drastic measures, exacerbating price volatility.
What are some of the consequences of the most recent rise in the NY C-market price, and how might this impact producers in places like Peru, Brazil, Indonesia, Burundi or Rwanda, where peak harvesting season is approaching?
Deforestation can increase. Producers may become incentivized by higher prices to expand production into primary forested areas with the hope of increasing yields as soon as possible. Yet within the time it takes for a forest to re-grow, prices will ebb and flow many times over.
Coffee quality can suffer. When the market goes up, farmers are more likely to pick their crops and deliver cherry to mills as quickly as possible to take advantage of higher prices. Fast delivery can hamper quality due to lack of selective harvesting practices and meticulous post-harvest practices.
The rising C-market price may encourage strip-picking, meaning the amount of quality coffees available in later months can be diminished. The price differential between red, ripe selective harvests and mixed underripe selections is often not enough to justify selective harvesting when prices are presently high.
Private collectors become competitive. Cooperatives often struggle to afford coffee parchment from their members because they must compete with heavily financed, privately owned buyers who are able to pay higher prices without delay. This can strain cooperative structures and membership benefits.
Ed Canty, the general manager of the United States-based trading cooperative Cooperative Coffees, addressed this issue in a story on price risk management (PRM) tools way back in 2015.
“Independent smallholder organizations always need to pay producers a local expression of the current commodity price to collect coffee. If they do not, producers will sell to someone else,” Canty stated at the time. “Estates pay workers a rate that is not immediately tied to the commodity price of coffee. So their risk of not being able to collect coffee in a rising coffee market is greatly reduced. This allows many Estates to sign fixed price contracts without protecting against the risk of a rising market.”
When market stability is higher, the tendency is for cooperative members to lean more on their organization for support and benefits. Stability in prices allows for selective harvesting throughout the harvest months, leading to potential increases in quality, which can in turn lead to higher consistent prices, and subsequently more cash for cooperative member benefits. The opposite can take shape when price volatility is higher.
Supporting cooperatives during a time where the C-market prices increase beyond the Fair Trade floor price ($1.40) is arguably as important as supporting cooperatives in times of low prices. Both swings potentially can disrupt the operations of a cooperative and its potential longer-term benefits to members.
Keeping cooperatives strong despite volatile price conditions requires buyers who are committed to maintaining or exceeding a higher floor price. Well-funded large buyers will always win the ‘race to the bottom’ price; yet not all buyers maintain the kinds of commitments cooperatives do to re-invest in those communities. The benefits often end once the C-market spike runs its course.
In addition to finding dedicated buyers, there are a number of price risk management tools that can help strengthen relationships between roasters, importers and cooperatives.
Kraig Kraft, previously of Catholic Relief Services and now with World Coffee Research, penned a series of articles addressing PRM tools and how they might help cooperatives achieve more financial stability.
In short, stability takes time, commitment, communication and trust — virtues that are difficult to come by in a volatile market in which producers have been historically positioned as “price takers.”
Editor’s note: This story was written for Daily Coffee News by Jon Ferguson, the North American Green Coffee Representative for the ElevaFinca Alliance of Cooperatives in Peru and Colombia. Daily Coffee News does not publish “paid content” or “sponsored content” of any kind. Any views expressed in this piece are those of the author and are not necessarily shared by Daily Coffee News or its affiliates.
Jon Ferguson is the North American Green Coffee Representative for the ElevaFinca Alliance of Cooperatives in Peru and Colombia. He is currently based in Lincoln, Nebraska, USA.