- How has the economic downturn impacted roasters‘ buying patterns in the US & EU?
- What trends and developments have we seen from specialty roasters in the US & EU?
- What impact do these trends and developments in consuming markets have on coffee production at origin?
In this recap we’ll take a look at both consuming and producing countries along with insights from some of our producer partners.
Impacts to US and EU roasters' buying patterns
While consuming countries have all felt the pressures of inflation and a fluctuating C Market over the last couple of years, the responses from roasters in different regions varied. From 2021 to 2022, US roasters showed small increases in purchases of all specialty coffee, while roasters in the EU saw a significant increase in the purchase of 80–84 point coffees and a slight decrease in the purchase of lots scoring above 84 points.
So, why the change? Looking deeper into the economic challenges that these regions have experienced over the 2021–2022 timeframe, some causes become apparent. Since mid-2021, the United States has seen 5–9.1% monthly inflation. Meanwhile, the inflation rate in the European Union reached as high as 11.5% in 2022, outpacing the US in each month from May 2022 through today.
A major contributor is the ongoing war in Ukraine. One consequence of the conflict has been an energy crisis throughout Europe due to sanctions placed on Russia. Though natural gas prices are down 85% from their peak in August 2022, they’re still trading more than double what prices were between 2010 and 2020, contributing to the higher inflation being felt across the EU compared to the US.
Trends and developments from specialty roasters
With the effect that the current economic situation has had in consuming markets, we’ve noticed a number of growing trends among roasters and new developments in their approach to their businesses. Some of these changes are likely part of the natural progression of the industry, while others are almost certainly a direct result of the pressure felt by roasters throughout this turbulent period.
Specialty roasters want to be more involved than ever in the broader supply chain, and are seeking ways to ensure that their purchases are supporting quality, sustainable, and ethical production practices.
- Environmental sustainability is critical for an agricultural product like coffee, and some roasters are making proactive changes to their operations to combat climate change and other environmental challenges.
- Social sustainability and ethical production are similarly high priorities, with some roasters looking beyond the usual certification labels many of us are familiar with to ensure good practices across all disciplines at the farm.
- Roasters are also seeking closer connections to origin by supporting social projects on the ground in producing communities, including NGOs or non-profit organizations, in an effort to ensure that their support is going directly toward the work that they hope to contribute to.
Developments in business
Beginning in mid-2021 and throughout the majority of 2022, the C Market traded at a multi-year high. The intersection of this period of high prices with ongoing economic pressures inspired many coffee buyers to be more attentive to the C Market, seeking a better understanding of what can cause the market to move and the ways in which it impacts their businesses. Better purchase planning and green coffee forecasting has been a positive result for those who have explored this topic, pushing buyers to look further ahead in their plans and putting them in a better position to make purchasing decisions for their businesses.
Impacts at origin
While we’ve discussed the changing trends and economic challenges faced in consuming countries, these factors have a notable impact on coffee producers and the entire coffee industry at origin. The impacts are wide ranging and often interconnected, creating a complex situation to navigate for millions of people who make a living in coffee.
Challenges at origin
- Global economic downturn is applying pressure to people living in producing countries, increasing the number of people choosing to move from the countryside to the city or even emigrate entirely to a new country seeking opportunity and prosperity. The result is a greatly diminished labor force available to work in coffee production.
- Costs of production are growing seemingly across the board, though the impact felt by producers in different countries will be influenced by several factors as we’ll explore in the next section.
- Climate change continues to present challenges to producers as they seek good quality and good harvest volumes from their crops in order to meet their rising costs of production.
- Price oscillations in the C Market have shown significant volatility, deviating from what is determined to be the average price as shown in the ICO Composite Indicator Daily Price graph below. With so much variance in the actual price line shown in maroon against the average price line, producers have struggled to know when is a good time to sell versus bad time to sell.
- Despite these challenges and growing costs, many specialty coffee producers remain committed to producing high quality crops and confident that quality lots will be able to connect with the right buyer.
Increased costs of production
Producers worldwide are reporting increases in their production costs, contributed to by several factors including growing labor costs due to a diminished workforce and skyrocketing prices for agricultural inputs as Javier Solis of Microbeneficio Cedral la Toboba tells us below. However, the impact of rising production costs can impact producers in very different ways when we take into account a producer’s total yield from year to year, as well as the fluctuation in their local currency against the US dollar.
Looking at the chart below, we can see Brazil’s cost of production (COP) estimates first broken down by Brazilian real (R$) per hectare and US dollars per hectare. Projections indicate a variation of 14% growth in Brazil’s COP from coffee year 2022/23 to 2023/24, resulting in a per hectare cost of R$20,724.51. However, with yield projections growing 25%—from 20.67 bags of coffee per hectare to 25.87 bags per hectare—this ultimately decreases the COP per bag by R$60, or 7%.
Source: GMT Group Research department, ICAFE, Producers
To add further complexity, we must also consider the impact of fluctuations in currency values against the US dollar harvest to harvest, as Pablo Guerro of Hacienda El Obraje alludes to in the video below. For example, Costa Rica’s colón has grown in value compared to the dollar recently, meaning every dollar exchanges into fewer colón to be spent. By comparison, the Colombian peso has devalued against the dollar significantly. When we look at this in relation to cost of production, we found that while Costa Rica’s total cost of production is expected to have grown 34% this year, producers are actually feeling a 43% increase due to the stronger colón. By contrast, the devalued Colombian peso takes an expected cost of production increase for the country’s producers from 15% down to just 3%.
While it’s difficult to know how these trends will continue to evolve and if any of them are here to stay, we’re proud to continue being an ally to people throughout the supply chain as we navigate these changing times. We’re grateful for the opportunity to continue supporting producers, roasters, and others around the world as we continue to find new ways together to move coffee forward.