Insights

High Market Prices And The $3 Cup Of Coffee

by | Sep 2, 2010

Category: Markets | Resilience

Key Insight

Over time, the growth of markets for differentiated coffees in producing countries will only make competition for good coffee tighter, potentially keeping prices high well into the future.

There have been discussions here recently of the market for the $3 cup of single-serve coffeethe challenges of sourcing distinctive coffees and the current high market.  I realized during a conversation last week with a veteran coffee importer that although these three discussions here were separate, they are related.

 

  • The current high market.
    My importer friend and I were marveling about the current prices in the NY “C” market, and he said he was worried that farmers would respond to the high prices by planting more coffee.  This is an understandable response to market signals — plant more when prices are up to cash in on high markets.  The problem, of course, is that by the time new coffee begins to bear fruit — 3-4 years — market conditions could have changed dramatically. In fact, when many farmers react the same way to the market signals, they practically ensure that demand and prices will swing downward since more supply is coming onto the market.  In the end, farmers who make what seems like a logical decision end up getting caught in the boom-bust cycle — farmers who increase their reliance on coffee in high markets take a hit when prices swing inevitably back.  My friend said he has seen markets like this before and that they inevitably give way to a price dive.

 

  • The $3 cup of single-serve coffee.
    I wonder, however, whether the price pendulum might not swing so far or so fast this time.  What separates this high market from others is that it is happening against a backdrop in which the $12 cup of coffee is not as newsworthy as it used to be and the market for the $3 cup of single-serve coffee seems stable and growing, even in a persistent economic recession.  With margins widening at the market end of the chain, presumably importers, roasters and cafés could absorb higher prices to farmers indefinitely.