Monday, 17 October 2016

Is coffee getting cheaper?

The historical data for coffee pricing causes me some headaches. The C-Market price for coffee is currently about $1.55 per lb. Looking at historical data, you can see that in February 1982 the price of coffee was $1.28 per lb. So, in the simplest terms, you might see coffee as being more expensive now. The important thing you’d be forgetting is inflation. A dollar was worth a lot more in 1982 than it is today.

The fact that the price of coffee per lb hasn’t really risen with inflation has increasingly bothered me. I decided to dig a little deeper into it, and take the monthly price for C-market coffee going back to 1980 and to adjust it for inflation.

Inflation calculators are going to be a little unreliable, but I think they’ll prove the point. I checked the numbers with a few different calculators online and they all seemed to agree within an acceptable margin of error.

The graph below is the price of coffee for the last 36 year, against the price of coffee back adjusted for inflation. If a dollar was worth twice as much in 1988, then the price for coffee that year would be doubled, so that we could compare it against today’s pricing. I included simple linear trend lines on both graphs.


Interestingly, the trendlines tell two very different stories. One implies a small increase in the prices paid for green coffee, while the other suggests a significant decline. It also puts into context the previous price spikes, suggesting they were far more dramatic than we might have thought.

The World is Shrinking

This is not to say that the financial models in the world of coffee in 1980 were the same as today. In theory, farmers might have been earning comparatively more, but costs would also have been higher. For example, fertiliser would have cost more historically. In searching for historical data on this topic, I came across this blog post. Here’s the pricing of fertiliser before and after adjustment for inflation.

fertilizer1 fertilizer2

While increased costs did play a role, and this is just one example, we can’t ignore the fact that growing coffee is a less attractive profession than ever. The greying of farmers most definitely applies to coffee farmers too. The average age of a coffee farmer is around 56 years old. It might have something to do with the fact that it just pays less well.

This is overly simplistic. I have included cost of living in various producing countries, I haven’t looked at the quality of life for coffee farmers historically either. There isn’t much data on the financial model of running a coffee today, let alone 30 years ago. I have no idea on whether data on the profitability of growing coffee over the years even exists. I doubt it.

What about retail?

There isn’t a lot of data about the cost of a cup of coffee, and even now I’d say it is pretty hard to tell say with any certainty what the price of a cup of coffee is today! However, the ICO do publish a retail price per lb in the USA, and that data back to 1990 is freely available online. I took those numbers, adjusted for inflation again, and had a look at the price per pound.

I didn’t use the C-price of arabica for this graph, because arabica isn’t necessarily what all that is going into those retail bags. I used the ICO Indicator price, that is a composite price of all coffee sold. This is why the spikes in price are less dramatic.


So far, not so interesting. They look like they track with each other pretty well. You’ll notice a slight time-shift, where sometimes changes in green coffee pricing seem to kick in the following year. I would presume this is down to the significant stocks held, and forward contracts bought, by the sort of companies whose products make up the bulk of the ICO’s retail pricing measurements. Once adjusted for inflation it would appear the price of a bag of coffee has been relatively stable.

I did want to look at it another way. I was curious about margins, and how they moved. The true cost of goods for products like these are always going to be pretty opaque, and so this next chart is pretty simplistic. If the price of coffee was $1.00 and the retail price was $5.00 then the multiplier here would be 5.


The simplistic reading of this graph would be that when the red line is high, there are high margins in coffee. Again, this is simplistic because of the stocks of coffee, and forward contracts. However, when the market hit its low in 2001-2002 the margins look very good. Coffee didn’t get commensurately cheaper. The nature of competition would ultimately drive prices lower over the next few years, but they don’t bottom out until 2004. (Whether the consumer benefits from there always being someone in the market willing to be cheaper/to make less money is a separate topic). Equally, it looks like coffee companies tried hard not to raise prices until absolutely necessary during the last price spike a few years ago.

I wish I had older data (I have a request in with the ICO, but unfortunately I can’t justify spending £250 on the data for my own satisfaction and interest…) to see how it looks between the 1960s and the 1990s. I think the limited data I have doesn’t really give too much clarification to the question I’m asking.

In conclusion

We live in a world where everything is getting cheaper. That doesn’t mean that this is necessarily a good thing. The USDA has interesting data on food and inflation, as well as spending vs income. I don’t think I can really draw any hard conclusions, even if the prices paid for green coffee (once adjusted) are declining. I think it is far to say that coffee may well be less compelling as a crop for farmers than before, but then farming as a whole may be less compelling. Price competition in consumer markets applies pressure, and so the desire cheaper food, or cheaper coffee, ends up being passed right down the chain to those who ultimately bear the brunt of that pressure: the farmers.

Speciality has long considered itself immune to this, but that is changing. At some point soon cafes, and coffee roasting companies, are going to turn to pricing to be more competitive as they have to fight harder and harder for customers. This ends up being briefly good for the consumer, but ultimately results in less diversity, less choice, and lower quality – and that’s before we consider the impact on the supply chain.

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