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Bear Market Boomerang

BY DONALD N. SCHOENHOLT

The 1997 bull coffee market frightened many small U.S. roasters. The question on every roaster’s mind was, “How do you sell a product whose raw material price is between three and four dollars a pound?” It took every ounce of courage for those roasters who held-back from the urge to buy into the skyrocketing market. For those who held back the reward was the benefit of a reversal in market fortunes, beginning in late 1997 and continuing into 2002. In the initial tumble of values those who had held back jumped on the opportunity to take advantage of their competitors’ higher inventory costs. For others it was necessary to discount their inventory values and sell at lower margins to remain competitive.

By 2001 the “C” market was range bound, but the range was in the half-dollar range, and at origin the farm workers were deep into their second year of economic strangulation. Roasters were getting used to career low coffee prices, and at the same time were becoming aware of the need for supporting farm produce prices for coffee. Roasters, sensitized, by articles in the trade periodicals, and newsletters, and programs sponsored by SCAA began thinking about value added items from origin such as those certified by sustainable coffee organizations as Rainforest Alliance, and Smithsonian Migratory Bird Center (SMBC), Transfair USA, and the various Organic certifying organizations. A few even initiated direct partnering relationships with producer farms. But mostly we enjoyed the lowest prices for best quality coffee in decades, and few if any of the roaster trade thought that was a bad thing.

But something is happening, something strange and unexpected and dangerous to the health of all small roasters. Everything we sell is being reduced in value: our inventories, and likewise our accounts receivable. While the number of pounds sold might have stayed steady or increased, unit sales did not increase at the rate that prices fell. Margins may hold their own - even amidst growing competition they may even have increased for the lucky few, but the number of cents-per-pound profit just isn’t what it was when the “C” was north of a dollar. Meanwhile overhead costs: rent, payroll, employee benefit packages, insurance costs, utilities, and capital expenditure costs have risen. One thing is becoming painfully clear in this third year of low prices. There is plainly less money to go around.

Halloween may have passed, but the goblins are at the doors and windows. Less money, lower profits, lower value businesses, and the specter of less choice coffees from origin, in years to come, may trigger another violent up-swing in specialty coffee values. The added wrinkle in this possible scenario is that poorer grades and Robusta coffees may stay at historically low price levels even as the better grades of best quality Arabicas will take-off. In this story-line we may all want to hide under the mattress.

Four corporations, their subsidiaries and affiliates buy almost half of all the green coffee in the world. These companies individually and collectively seem to believe that the way to combat low prices is to work to increase consumption of coffee. What they are saying is that the world would be a better place if they did more business. These are the descendents of the same brands that brought coffee to its knees in the 1960s by selling products so bad in taste that an entire generation of Americans turned its back on them. These same companies are the largest buyers of the oceans of low grade Robusta end Arabicas coffees that are drowning the price of better beans and the farmers that produce them today. History and common sense tell us that bad tasting coffee does not increase consumption.

Oxfam International, made up of 12 organizations that work, in part, to ease poverty in the world, has issued a Coffee Rescue Plan. It includes proposals to destroy surplus coffee stocks, promoting trade only in quality coffee, paying farmers a fair price for their beans and creating a fund for farmers so that they can develop alternate means for making a living. You can read the full text of the 56-page Oxfam report Mugged: Poverty In Your Cup at www.oxfam.org.

Now is the time for all good men to come to the aid of the party. It’s no joke. Buy some value-added specialties, get Organic Certified (get some of the costs bock under the National Organic Certification Cost-Share Plan, authorized by the 2002 Farm Bill) and start roasting organic beans. Join SMBC’s “Bird Friendly” shade grown coffee program or other programs with sustainable coffee ideals. Buy some Fair Trade coffee to guarantee farmers a better than market price. And where possible, upgrade your blends to better and better coffees, outclassing the competition. This takes work, but initiating programs as these will help your bottom line by raising your average price per pound. Support efforts that ease the lot of families at origin such as Grounds For Health and Coffee Kids (www.coffeekids.org) whose programs support alternate ways for coffee families to earn money so that they are no longer wholly dependant on their personal coffee economy.

We can add value to the things we sell buy buying the best beans, and by introducing products that support farmers while giving consumers broader market choices. It will not take courage for roasters to do the right thing now, only a sense of self preservation, and a modicum of common sense. For those who hold back the price may be a painful economic one to pay. Those who choose their course wisely will help reverse the trends that are strangling farmers, and will soon engulf the small roasters at home as well. In the long run action now will save our own businesses, and our friends at origin.

Donald N. Schoenholt, practices what he preaches. His company, Gillies Coffee, Brooklyn New York is an original supporter of Coffee Kids, and Grounds For Health, a participant in the SMBC “Bird Friendly” shade grown coffee program, and is New York City’s first licensed Fair Trade roaster. He can be reached at 1-800-344-5526.


Tea & Coffee - February/March, 2003
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