SOUTH Africans usually concern themselves with hard commodities such as gold, oil and platinum. But the outlook for small producers of a soft commodity that many of us consume every day seems bleak.
On Monday, coffee futures fell to a two-week low on ample global supplies and an improved weather outlook for crops in Brazil. A two-week low is of little concern, but price movements in coffee over the past four years suggest a worrying trend for the most traded commodity by volume after oil.
In 2010-11, the price of coffee more than doubled. In 2011-12, it halved. Futures for high-quality Arabica, which is mainly used by speciality coffee companies such as Starbucks, has fallen more than 32% over the past 12 months — a third successive year of declines — and show little prospect of recovery in the short term. By comparison, futures of the less glamorous Robusta beans have fallen 12% over the past year.
Arabica accounts for about 60% of global production, but it is harder to grow and has a richer flavour, which is why is commands a higher price than its country cousin Robusta, which is easier to grow and considered less flavoursome. While seasonal factors, weather, and disease play some role in day-to-day price fluctuations, the inability of the industry to self-regulate lies at the root of the problem.
The demand growth for coffee has been fairly stable, rising at 2%-3% a year. But during 2009 and 2010, supply problems in Colombia where much of the high-grade Arabica beans are grown saw the price of Arabica climb steadily.
Coffee growers, not unreasonably, sought to take advantage of the higher prices by planting more crops. The trouble is that coffee, like olives and some types of stone fruit, takes between three to four years before its first harvest. At the same time as eager producers were waiting for their crops to mature, buyers started substituting cheaper Robusta beans in their blends.
In parts of Cape Town and downtown Johannesburg (where artisanal coffee is a right and fair trade a necessity) this may have been seen as unacceptable, but for the average buyer at Costa and Starbucks, price was more important than whether the blend was 60% or 30% Colombian. The result was that by the time the new Arabica plants came to fruition, consumers had adjusted to the new blends and merchants saw little reason to revert to the more expensive Arabica beans.
The spread of a virulent coffee plant fungus known as la roya or leaf rust — which has already destroyed about 20% of the 2012-13 crop — will help bolster prices to some extent in the short term, but when the new plants start bearing in three to four years, the industry is likely to find itself in the same position as it does now, with supply overshadowing demand and pushing prices lower.
While coffee prices have been falling, the cost of inputs such as fuel, labour and fertiliser have been rising, punishing already thin margins and threatening to put producers in Africa and South American out of business.
But the outlook is not all bleak. While global consumption is growing at a fairly steady 2%-3% a year, some analysts predict that in China demand growth is closer to 40%. Not surprisingly, the growth in demand for coffee has encouraged Chinese farmers to swap tea for more lucrative coffee. Coffee thrives in the same high-altitude areas where tea is grown and commands up to three times as much money as tea.
The trouble is much the same as has been plaguing the South American and Central American farmers. With lead times between three and four years, feedback from the market as to whether there is an over or undersupply is too slow to prevent the highs and troughs the market is already experiencing.
The long-run result? Smaller farmers who lack sufficient buffer to ride out the peaks and troughs in prices are likely to be driven out of the market. This won’t have much effect on Starbucks and Costa, but to the families and communities of small farmers it will be catastrophic. For the artisanal roasters at The Biscuit Mill and Market on Main, well, one hopes they’ll shave their beards and get a proper job.