Believe it or not, coffee from all around the world, regardless of country of origin, is sold based on a price set thousands of miles away in New York City. This is because coffee is traded internationally as a commodity, meaning it’s sold on a regulated market controlled by the Intercontinental Exchange (ICE). The trading price of Arabica coffee on the ICE is what is used as the base price for coffee across the globe. This is referred to as the C-Price, and it is what all coffee producers must follow when pricing their products.
How the C-Price works
This doesn’t mean that all coffee is priced the same however. Depending on quality, coffees will be priced based on the C-Price as a minimum, for example single origin coffees will come with an added premium on top. As with most commodities, at a base level the C-Price fluctuates according to simple supply and demand, so dwindling supplies or an increase in popularity would cause the price to increase.
The complication with this though is that the way future contracts work ends up having a direct impact on the supply and demand, causing C-Price fluctuations based on harvest speculations. For example, if buyers believe there will be a weak harvest in the future, they will start securing contracts at a higher rate before the prices go up. This however causes the demand to increase, which ends up hiking up the price. This also works the other way around, in that if a large harvest is predicted buyers will hold off from securing new contracts, causing the price to drop along with the demand.
Coffee price fluctuations since 2007. Source – Business Insider
Impact on coffee producers
This lack of stability of the value of their product can cause real issues for the welfare of coffee farmers. The C-Price has no relation whatsoever to the cost it takes the farmers to produce the coffee, so even slight drops could completely prevent them from being able to turn a profit. This can have a knock-on effect for whole communities and even whole economies, as coffee beans often represent the main source of income for rural areas of coffee producing countries. In fact, 90% of the world’s coffee production takes place in developing countries. For example, in Ethiopia coffee is the second biggest export after gold, accounting for 19% of their exported goods each year.
Is it time for a change?
Many coffee producers strongly believe that the C-Price model is heavily flawed and should be replaced with a system that accounts for production costs to build a more stable industry. The trouble is that there is no clear alternative that would reduce the risk for coffee producers whilst maintaining the opportunity for buyers to boost their profit margins. Some have suggested multi-year fixed cost deals between roasters and producers may be the way forward. While this would increase stability, it could mean roasters missing out on lower prices, or farmers having to stick to low prices if the market value increases.
With no easy fix in sight, it’s likely to be an issue that’s hotly debated in the coming years. As consumers become more interested in where their coffee comes from, increased transparency in the pricing and sustainability seems inevitable. Hopefully the industry will continue to take positive steps towards building a more stable future for coffee farmers around the world, as without them we would be stuck drinking tea!