The volatility of coffee prices
Somewhat less than two-thirds of the world’s coffee production consists of Arabica, and more than one third consists of Robusta coffee (in 2006–2007, production was respectively 73.25 and 46.64 million 60-kg bags). Some 85 per cent of world Arabica production and 20 per cent of Robusta production is in Latin America. Asia accounts for five per cent of Arabica production and 60 per cent of Robusta production. Africa accounts for the rest.7
Arabica grows at higher altitudes, and the tree is less “robust” (more demanding in maintenance) than Robusta. It has a milder taste, and trades at higher prices. Nevertheless, it is Robusta which has in recent years seen the fastest growth—not that long ago, it only accounted for about a quarter of production. This increasing prominence of Robusta is not so much because of the effects of global warming, which over time will indeed make it necessary for some of the current Arabica producers in Africa to shift to Robusta, but rather because of changes in coffee drinking habits and technological advances which have made Robusta easier to use in blends. 8
Chart 1 shows world Arabica and Robusta prices. There are five aspects of price behaviour evident from this chart that merit commenting:
In the long run, coffee prices show a declining trend. For some farmers, price declines have been compensated by productivity increases, but this has been the case only for a minority. By and large, coffee farmers have seen their coffee revenue falling. At the same time, the total amount paid by the final consumers for coffee has been growing, indicating a rapid decline in the share of the “coffee pie” received by producers.
Around this long-term trend, coffee prices have been very volatile. In the period covered by this chart, Arabica prices, for example, have moved between around 50 ¢/lb and over 250 ¢/lb. Even in a year with relatively stable prices, the difference between the year’s lowest and the year’s highest price is easily 20 per cent. Similar volatility can be seen within a month and even, when observing futures market prices, within a day. Table 1 further illustrates this point: almost half of the time, the average price of a month is more than five per cent higher or lower than the average price of the previous month.
FO Licht’s International Coffee Report, March 2007. Among the consumer trends that have boosted demand for Robusta: many of the “frontier” markets for coffee, e.g., traditional tea-drinking regions, have a preference for instant coffee in which one can easily use Robusta; the craze for “flavoured” coffees in North America makes the taste of the underlying coffee less important; and many coffee consumers have shifted to cappuccino and the like, in which the coffee is mixed with milk. At the same time, new processing techniques such as steam-cleaning are making it easier to remove undesired flavours from coffee beans, making it possible to use more Robusta in blends without negatively affecting the taste. 7 8
9 The main reasons for this are threefold. First, most of the benefits of developing niche markets and value- added products (such as soluble coffee and branded coffee) have been captured by roasters, not producers. Second, wage, packaging and marketing costs for coffee (mostly incurred in developed countries) have steadily increased. Third, developed country taxes are normally a percentage of sales value, and have thus increased in line with or even beyond the overall increase in sales prices (developed country governments now receive more in tax income on the coffee imported from developing countries than the growers receive in total revenue). See Bryan Lewin, Daniele Giovannucci and Panos Varangis, Coffee Markets – New Paradigms in Global Supply and Demand, The World Bank, March 2004.