Long-Term Bean Counting: What You Need to Know About Buying Right

By Mike Ferguson

If you work at any point in the coffee supply chain, you know that the last two years have been unusual, to put it mildly. Even the most casual coffee consumers have noticed price increases. Not only did we see historically high prices for green coffee, but perhaps more significantly, historic if not unprecedented and prolonged volatility. In an industry where coffee buyers regularly took days to make a decision, there have been times over the last 18 months when a buyer couldn’t even take the lunch hour to think about it because the market was experiencing substantive fluctuations within the space of not only hours but minutes.

Coffee buyers were suddenly day traders.

While a three-dollar coffee market creates challenges, the consumption side of the supply chain adjusts. Everyone complains about higher prices, whether it’s gas or grapes, but inevitably, one way or another, we find ways to accommodate our costs, as painful as they may be. Witness the general relief (or perhaps “taking a breather” is more accurate) over prices currently bouncing around $2.30, and yet this still represents a 65-percent increase over prices two years ago. To top it all off, as the floor price for commercial-grade coffees broke records, specialty coffee roasters experienced little, if any, retreat within the quality differentials they pay above the floor price. In fact, because the supply/demand pinch is more keenly felt among the very highest quality coffees, quality differentials often increased despite 50–100 percent increases in the floor price. For those buying specialty coffees, the market price became only the first shoe dropping.

Generally speaking, specialty coffee roasters understand higher prices, even at the level of commodity grade quality, to be more aligned with, or at least approaching, the true value of coffee. Higher prices are temporarily inconvenient but ultimately better for a product that has been undervalued relative to its inputs for over 100 years. The last two years has been time to walk the walk.

The real challenge in the “new reality” of the coffee market is not so much the $2.00–3.00 floor as it is the relentless volatility. As an industry segment, we find this volatility exasperating because unlike the trend change in floor prices, much of the volatility has nothing to do with market fundamentals or anyone who is actually working in the coffee business outside of clicking a mouse. It’s difficult to be angry with a world-wide increase in coffee consumption, from the remarkably successful internal consumption campaign in Brazil to the transitions toward coffee, if not away from tea, throughout all of Eurasia. It is equally difficult to be angry that supply has not kept pace or, in some cases, declined. While these fundamental market variables bring about a certain amount of instability on their own, they are also a breeding ground for speculative trading, which adds a whole new layer of volatility.

Opinions vary on the range of prices, floor to ceiling, we’ll see over the next 18–24 months, but few think the volatility itself, often looking like a Richter scale during an earthquake, will go away any time soon. Though coffee importers are understandably non-committal when it comes to fortune telling, the consensus advice from brokers is, catch your breath and be prepared.

As a roaster, tactics for dealing with the new reality of the coffee market can differ greatly depending on your business model, your volume, your product mix, cash flow and positioning. Beyond the obvious “buy low,” the following will help roasters weather the market storms.

It’s a Due Date, Not a Departure Time

We all know what the words “on time” next to your flight number on the departure screen actually mean, “probably on time, maybe, but don’t bet on it.”

Unfortunately, this is the approach too many roasters take to paying for their green coffee. It is more common than not for coffee roasters to pay green coffee bills late, often very late. Regardless of how you feel about the legitimacy of “stretching” your vendors, to use a popular euphuism for paying late, and the tolerance your suppliers may have demonstrated in the past, the fact is that doing so puts you in a weak position for dealing with high costs and a volatile coffee market. Watching your credit limit shrink as your costs rise is a frightening moment. If you can’t buy coffee, you’re no longer a coffee company, or maybe, no longer offering the same level of quality as you move to less expensive coffee, which usually means a downgrade in quality for single-origins.

Green brokers are more likely to arrange delayed payments in unusual times from roasters who have always paid on time than those who paid late even when the market was at 50 cents (remember?). The best hedge against a $3.00 plus market is to make cleaning up your payables now a priority, especially with green coffee suppliers.

A Relationship by Any Other Name Is Still a Relationship

Roasters use a variety of marketing descriptions for developing and maintaining relationships with the farmers who grow the coffee they roast, and even those who use the same phrases, such as direct trade, may not mean the same thing by it. In terms of weathering a rising and/or volatile market, the keys, regardless of what you call them, are 1) an actual relationship, including face to face time and regular communication and 2) direct discussion and agreement on price that are not wholly reliant on a third party.
If you have read all the literature your importer provides about a farm and the farmer but you have never visited the farm and met with the farmer to talk about how you value their coffee and how you’d like to invest forward in their farm, don’t be surprised when the price increases in direct proportion to the market. If there is no real relationship, the only basis for talking about price will default to the time- honored price discovery mechanism of the futures market.

Even a longstanding and real relationship is no guarantee against the influence of trading prices in New York, of course. Competition for the very best coffees is increasingly fierce and when it comes time to renegotiate a contract your favorite farmer may have many suitors. Still, a meaningful relationship, and not one based solely on the marketing value of the word, provides an advantage, not only in maintaining supply, but maintaining quality when high prices provide less incentive for more work. David Griswold, President of Sustainable Harvest Coffee Importers explains, “Securing great coffee gets harder when market prices are high, because growers don’t have the same incentive to produce the great quality when they can get pretty good prices with what many might consider marginal quality. So cultivating great long-term relationships—knowing your source of supply and staying in close contact with the reality at origin, especially with the additional challenge of changing climate patterns—has become part of the new reality of coffee buyers.”

Out Damned Spot

The markets we serve and our attempts to serve them, wherever we sit in the quality continuum, are just as complicated as the coffees we buy, or don’t buy. Most roasters, if not all, will need to buy coffee spot, out of a broker’s on-hand or nearby inventory, at some point. Longstanding relationships in this arena help assure, though not guarantee, that spot buys are a good fit, assuming availability.

But when prices increase dramatically, and especially when the market inverts (closer contracts are trading higher than distant contracts) importers thin their inventory dramatically, in some cases by more than 90 percent. If buying spot is your “hedge” or if you’re just old school, even a long established and trusting relationship with an importer can’t help when navigating the kind of competition that emerges when only 10 percent of the standard inventory is available.

“Among smaller roasters,” says Griswold, “it is those who are finding creative ways to forward book their green coffee needs and develop relationships with suppliers, rather than being fully dependent on spot purchases, who have weathered the storm.”

Forward price coverage is not a magic bullet, to be sure. Even the crystal ball of a large national roaster/retailer can be less than perfect if the market retreats after they fixed their prices. As with all matters involving money and the future, everyone advocates a balance but everyone has a different idea of what that balance might be. Importers holding very little inventory like roasters to fix, of course, while small and mid-size roasters like to keep their options open where possible and fix only their core offerings and blend components. Those seeking the very best coffees would prefer to detour around both options. However, as already noted, competition for these coffees is high and few producers can ignore a 65–100 percent increase in the market when it comes to renegotiating direct trade contracts while several roasters are knocking on their gate. The meaning of “relationship” will continue to be tested.

The Price is Right

Although a business case may be made for having held prices during the recession, while retailers were facing empty seats and the market was relatively stable, it is difficult to defend or have patience for not having increased prices over the last 18 months. The margins are the margins. Run your business properly. If your costs go up and there is no solid indication that the new cost is an anomaly, raise your prices to reflect the reality of doing business and let the chips fall where they may, otherwise you are creating false economies within your own business systems and those of your customers.

Roasters within every market segment have scrambled to explain changes in the market to both their wholesale customers and consumers, as they should. At the same time, increases in price (dare we call them “corrections?”) can test the quality of our quality-driven business models. Is our coffee as good as we think (imagine) it is and are we selling it to the right customers?

Mark Inman, now a senior trader for Volcafe Specialty Coffee, was a roaster and green buyer for more than 20 years. He notes, “If you are a roaster who has always dealt with super-premium coffees you had a real test of your customer base by seeing if they would truly pay for quality or would they stray looking for great quality coffees at lesser prices. Some roasters that stayed true to their mission weathered that storm and solidified their reputations as purveyors of great coffees.”

Respect the Blend

High coffee prices have caused some roasters, albeit kicking and screaming, to re-examine the role of blends among their offerings. Single-origin coffees were, 25 years ago, one of the ways the young specialty coffee segment differentiated itself from traditional coffees, which were almost exclusively blends of defective beans, the higher quality masking the lower. Single-origins were pure. Blends covered a multitude of sins. An influx of new and ultimately very successful coffee roasters emerged over the last 15 years with a near single-minded devotion to single-origin coffees, and some have dismissed blends as being innately inferior.

Inman has watched this marginalization of blends and it is difficult to improve on his observation, “I think there was a real reason for our market to have had the laser-like focus on single origin coffees for as long as we had it. It allowed us to educate the consumers about the wide variety of flavor range in a country (regional tastes/varietal tastes). And globally, the world is filled with interesting and diverse coffees, a treasure-trove for the person who loves to taste new and interesting things. But in the end, even the best single varietal coffees are lacking in something. It’s a wonderful intellectual and sensual exercise to explore the taste of place but many consumers are simply seeking great coffees that have it all. And that is where blends come into play. I think most roasters/green coffee buyers who came up in the trade over the past 20 years were taught to believe that blending is what you do to cut costs and introduce poor quality coffees without anyone taking real notice. It was a type of cheating. A single origin is naked and pure and unable to hide its flaws. If you were an astute cupper, you could find the real diamonds out there and you would be recognized if you had a consistent track record of finding and roasting those diamonds. But we have learned that that philosophy is overly simplistic. We now know that blends don’t have to be about saving money or hiding inferior green, they can be about building outstanding coffee, lacking in nothing. Like a great Bordeaux versus a great Syrah or Malbec, the blending theory is about creating a very complex and wonderful tapestry of flavor, deep and complex with layers of flavors versus showcasing the best of a specific origin.”

Pay your bills. Know your farmers. Balance your purchasing strategies. Make sure your prices reflect your costs. Revisit the art of blending. Can it be this simple? Perhaps not, but when you discover the best roasters practicing these methods, they deserve a second look.

Mike Ferguson entered the coffee industry in 1998 when he joined the staff of the SCAA as communications director. When he left SCAA in 2007 he was chief of staff, according to his business cards. After a brief and infamous sojourn in Seattle, he worked for Coffee Solutions and his own consulting firm, Fresh Ground Consulting. In 2009 he joined Batdorf & Bronson Coffee Roasters as Business Development Director, a long time ago tomorrow morning. Just go with it.