Strong dollar can benefit coffee farmers – but UK roasters face collapse

UK roasters
  • The pound fell to a record low against the dollar at $1.033 on Monday
  • UK coffee roasters fear it will add further to rising costs of production
  • Producers where local currency is not pegged to the dollar could benefit

UK COFFEE roasters have expressed concern about the impact of a weak currency, as the value of the pound fell to a record low against the dollar on Monday.

Fears that costs, which have already risen substantially due to factors related to conflict in Ukraine, will spiral out of control are widespread among roasters, many of whom feel they will be unable to raise prices sufficiently to cover them.

Arabica coffee on the C market is already currently trading at a higher rate compared to last year at $2.26 per pound – a 16.5% increase.

“Feeling a lot of pressure in the UK specialty coffee market right now,” Freda Yuan, head of coffee for Origin Coffee Roasters, wrote in an Instagram post on Monday. “[£1 was worth] $1.35 at the beginning of the year and now it’s $1.06.

“If I need to buy some green coffee now, compared to the same coffee I purchased eight months ago, the price [has] hiked from £5.22/kg to £6.96/kg. It’s a 33% jump. I cannot dare to imagine what is going to happen for the next purchase if the situation remains the same.”

The value of the pound against the dollar has been on the slide since January. However, it quickly fell to a record low of $1.033 on Monday following the announcement of massive tax cut plans by the UK government.

It has since regained some ground to reach $1.11, but, coupled with soaring inflation and rising energy prices, coffee roasters face a difficult few months ahead.

“It’s a very challenging environment downstream of the import side,” explains UK coffee trader Sam Maccuaig. “There’s enormous pressure on UK roasters at a time when coffee is already very expensive.”

In response, he says that most roasters will likely have to make a choice: to raise prices, lower coffee quality, or a combination of the two.

“The net result is a crunch. Roasters are either going to have to pass prices down to the cafe or consumer which might not be accepted. Or they can drop quality.

“We will see people choosing to do both of those. Some will maintain quality and increase price; some will increase price a little and reduce quality or buy something with the same cupping score but a lower level of traceability. And some will introduce lower quality coffees broadly into their plans and, basically, buy cheaper coffee.”

coffee producers

“Double-edged sword” for producers

The plummeting value of the pound has happened at the same time that the dollar’s value has risen. This year, the dollar index (DXY), which measures the US dollar against other major currencies, has increased by 15%, putting it at a 20-year high.

Although this is bad news for roasters who buy their coffee in dollars and will have to pay more for the same amount of beans, for producers it can have mixed outcomes. This largely depends on whether the local currency is pegged to the dollar or not.

This is because traders sell coffee on the international market in dollars. If the local currency falls in value against the dollar, it means that producers will receive higher income for their crop.

However, Sam explains that for all coffee origins, the strong dollar presents a “double-edged sword”.

“If you look at Colombia, imports, such as fertilisers, are derived from petrochemicals which are priced in dollars – so their costs of production go up,” he says. “But when exporters sell their coffee, they are selling in dollars and exchanging back into the domestic currency. So they are getting more of that domestic currency back because the exchange rate on the dollar has favoured it.”

The knock-on effect of roasters’ buying behaviour can also have an impact on producers, particularly for those who specialise in high-end coffees. As costs rise and roasters pass higher prices onto customers, it becomes increasingly difficult to justify purchasing 90+ coffees. Therefore, many producers who rely on selling 90+ coffees could start to lose out.

“If we see less interest in the coffees at the higher end of the spectrum which are already incredibly expensive, that higher end income can’t be counted on,” Sam explains. “It’s thankful that the market prices are high at the moment as that provides some buffer.”