Negative Impacts of Coffee Bean Market Futures Price Fluctuations on the Coffee Industry Chain

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Recently, the volatility in the coffee bean market has made participants throughout the entire coffee supply chain feel nervous.

On the surface, the rise in coffee prices seems like a good sign for coffee farmers. However, the reality is not so. The soaring and fluctuating coffee prices have long-term negative impacts on many cooperatives and small-scale coffee farmers.

When coffee futures market prices were at lows, such as during most of 2018, 2019, and 2020, it was predictable that they would rebound. However, such volatility often leads to severe measures being taken by participants throughout the entire coffee supply chain (including roasters, importers, exporters, and growers), which in turn further exacerbates price fluctuations.

Consequences of Rising Prices

What consequences have resulted from the rise in New York coffee futures market prices? How will this affect countries like Peru, Brazil, Indonesia, Burundi, and Rwanda, which are about to experience or are currently experiencing harvest seasons?

① Reduction in forest area. Stimulated by rising coffee prices, growers expand their planting areas into primary forests to quickly increase yields and obtain more benefits. However, during the time required for plant growth, prices will still experience multiple ups and downs.

② Coffee quality is affected. When market prices rise, coffee farmers harvest coffee cherries as quickly as possible and send them to processing plants to obtain high prices. However, when farmers are racing against market prices, the time spent selecting coffee cherries is shortened, adopting rapid stripping harvesting methods, increasing the likelihood of harvesting unripe coffee cherries. Since the price difference between selected ripe coffee cherries and those mixed with unripe ones is too small, it fails to incentivize farmers to spend time selecting ripe coffee cherries.

③ Private buyers become more competitive. Due to private buyers having substantial funds and being able to pay higher prices promptly, cooperatives often struggle to obtain parchment coffee (referring to unroasted coffee beans with the parchment layer) from their members.

As early as 2015, this issue was mentioned in an article about price risk management tools.

Independent small agricultural organizations need to pay farmers the current local coffee commodity prices to obtain coffee cherries. If they don't pay, farmers will sell their products to others. However, the wages paid by coffee estates to workers are not linked to current coffee commodity prices, so their risk exposure is significantly reduced. This also allows many coffee estates to sign fixed-price contracts, protecting themselves from market price increases.

When the market is stable, cooperative members rely more on the cooperative for support and benefits. Stable prices encourage farmers to select coffee cherries during the harvest season, thereby improving coffee quality, which in turn raises consistent prices, allowing cooperative members to obtain more benefits. However, when prices fluctuate significantly, the situation will be the opposite.

Regardless of whether prices in the coffee futures market are high or low, support for cooperatives is crucial. Because both types of fluctuations can potentially damage the operations of cooperatives and the long-term interests of coffee farmers.

In situations of price volatility, buyers need to commit to maintaining or exceeding higher floor prices to maintain the strength of cooperatives. Well-funded large buyers can always win "race to the bottom" pricing. However, not all buyers reinvest in the community like cooperatives do: once the coffee futures market surge ends, the benefits disappear with it.

Price stability in coffee requires time, commitment, communication, and trust. In this turbulent market, growers are always positioned as "price takers."

What is C-market

C-market's full name is coffee commodity market, which is the coffee futures market. The global coffee price of C-market is determined daily by traders on the New York Stock Exchange.

Coffee is a frequently traded commodity, with global exports exceeding hundreds of billions of dollars. Although the coffee traded on exchanges is quite different from the cup of coffee in your hand, C-market actually has a significant impact on the price you pay for coffee.

How Coffee is Traded in C-market

Coffee prices in C-market change according to supply and demand conditions, as well as according to traders' predictions of future supply and demand.

Players in C-market are either trying to buy coffee at low prices or sell it at high prices.

However, many transactions in C-market revolve around futures contracts. In C-market futures contracts, buyers agree to purchase a specific quantity (usually 375,000 pounds) of coffee at a specific price at a specific time, with the price determined by the expiration date of the futures contract. Sometimes, the expiration date is several years after the contract is signed.

The specific price of futures contracts is determined by the commodity market price at the time of signing, which means buyers tend to sign contracts when prices are low, ensuring they don't need to pay extra money when coffee prices soar.

Why Consumers Cannot Buy Coffee Directly from C-market

In C-market, the transaction volumes between buyers and sellers are typically very large, with purchase units starting in tons. Additionally, the coffee traded in C-market is unroasted green beans.

Therefore, buyers are mostly roasting companies. They purchase large quantities of green coffee beans, which are roasted and then distributed to places where consumers can access them daily, such as coffee shops and supermarkets. As market prices rise, consumer purchase prices also rise accordingly.

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