- Last year, coffee roasters saw profit margins squeezed by a perfect storm of factors
- The C price fell to $1.44 in January after a long period at more than $2 per pound
- Some believe that a low C price is better for specialty coffee’s value proposition – but others say this view is too simplistic
THERE IS a long-held and somewhat unshakeable view in the coffee industry that when it comes to splitting profits, traders, roasters, and coffee shops are laughing all the way to the bank.
The perspective typically takes the rich, consumer-facing businesses – the Starbucks and Costa Coffees of the world – and contrasts them against producers who are left with barely enough to cover their costs of production.
While many coffee businesses do indeed take a large share of the final price, sky-high arabica prices and unprecedented inflationary pressure have recently thrown this perception into the spotlight.
For nearly a year, the C price – a global benchmark for the price of arabica coffee – sat at more than $2 per pound. At the same time, energy prices due to Covid-19 and conflict in Ukraine, sent costs soaring. This was all compounded by a strong US dollar, which hit twenty-year highs last November.
For many, particularly those who resisted passing on the higher costs to customers, profit margins were squeezed almost to breaking point.
“There’s an assumption that roasters and cafés are making a lot of money and farmers are making nothing,” says Abdullah Ramay, the CEO of Australian specialty coffee roaster Pablo & Rusty’s Coffee Roasters. “But in Australia, that’s not true.
“There are a few businesses that are making high profits; but on average, a café’s net profit margin is around 3% and, for a roaster, it can be anywhere between 6% and 8%. Margins are very thin and a big chunk of that cost is green coffee. If it goes up by 100% to 150%, that rate very quickly writes off the margins.”
Is a low C price welcomed?
Last year, the compound effect of price rises and unfavourable exchange rates became even more perilous for those who had committed to voluntary price premiums – an agreement in which businesses promise to give back a percentage of profits either directly to the farmers or towards a project, such as building a school.
However, the ability to pay over and beyond the C price had become a cornerstone of the specialty coffee industry over the last two decades. So when roasters suddenly found themselves in a position where finances were being stretched, it directly challenged the foundations on which their businesses had been built.
The quickfire solution for many was to find cheaper alternatives – specifically, origins with lower differentials. In other words, where there was flexibility to shift origins, roasters would avoid passing on cost increases to customers by sourcing from farmers where differentials were lower, such as in Brazil.
“[Colombian coffees] are completely out of the question,” a UK-based specialty roaster which has been operating since 2018, told Coffee Intelligence earlier this year.
“They’re just too expensive at the moment. The best alternative for us in terms of flavour profile and cost has been Mexico. We want to continue sourcing Colombian coffees, but how do you convince your customers to pay more?”
When the C price fell to lows of $1.44 in January this year, it seems as though there should have been a collective sigh of relief from the specialty coffee community. But Abdullah explains that it’s not as simple as that.
“In the short term, some roasters might see their profits increase, because they are paying less for the product,” he says. “But if the specialty coffee farmers are not incentivised and rewarded fairly for all the coffee they are producing, they won’t be motivated to farm more specialty-grade coffee – and in the long term, everyone suffers.”
He suggests that rather than whether the C price is low or high is not necessarily the most important factor. Instead, it is the speed at which the price changes that has the biggest impact. “In 12 months there was a 100% change in the price,” Abdullah says. “It’s very hard for a supply chain to react to that, especially if your roastery only has a small supply of coffee.”
In search of a more sustainable approach
The specialty coffee market can alleviate some of the shocks of a low C price. But, as the last two years have shown, producers cannot solely rely on the premiums from roasters.
Diego Robelo is general manager of Aquiares Estate in Turrialba, Costa Rica. He suggests that farmers who have made decisions based outside of fluctuations in the C price have tended to fare better.
“It is frustrating how C market prices can generate so much stress to the producers, being an external factor that is not necessarily in line with the reality of the coffee farmer’s circumstances and their operational costs,” he says.
“Specialty coffee is a partial solution to mitigate the volatility shocks of the Intercontinental Exchange created by low C prices – but it is not a complete solution to the problem. Even when prices are high, producers continually look for better results to re-invest in the farms, payroll, or even the subsistence of all the families that depend on the work generated from coffee harvesting.”
In particular, he emphasises the importance of achieving demand for specialty coffee directly from roasters, as this can create a stronger working relationship in the long run.
“In my experience, a successful recipe for thriving as a specialty coffee producer is to achieve the demand for your product from coffee shops or the end consumer,” Diego says. “This creates a more solid relationship and strengthens the links of the chain and the connections to repeat business in the long run. If things are done correctly by all the parties involved, there is no reason why the cycle cannot repeat year after year.”
Yet buyers also have a role to play in adapting to the challenges presented by fluctuating prices. Essential is understanding that offering premiums when prices are low can come back to bite them – and that promising to provide a year-round 100% Colombian blend, for example, may not be sustainable if prices suddenly rally.
Instead, implementing a more thoughtful and organised approach to green bean purchases and building in business efficiencies before a crisis arises could help protect against price fluctuations.
“As a roaster, we have to be more efficient, add more value,” Abdullah concludes. “Because if there is one thing the market has realised, it’s that value matters.”