How do increases in the price of coffee affect co-operatives?
From early 2021 through until mid-2022, coffee prices increased steadily – with arabica futures reaching a ten-year high of US 258.95 cents/lb in February 2022.
These price increases are attributed to a number of reasons, including weather (such as a sudden frost which hit some of Brazil’s top coffee-growing regions in July 2021), the rising price of shipping containers, and the International Coffee Organisation halving its global 2020/21 coffee surplus to a 22-year low in early 2022.
However, in recent weeks, the global market price of coffee (also known as the C price) has fallen to an 18-month low of US 174.20 cents/lb. Considering these significant price fluctuations, it raises an important question: do producers earn more money when the C price increases? And for those who are members of coffee co-operatives – can higher prices help them to gain more access to resources and different markets?
To find out, I spoke with three coffee professionals. Read on to learn what they had to say about how rising coffee prices are affecting co-operatives.
You may also like our article on why frost in Brazil caused global coffee prices to increase.
How do coffee co-operatives work?
Before we understand how price rises affect co-operatives, we need to revisit how coffee co-ops function.
Essentially, a coffee co-operative is a group of producers who join together to collectively improve their access to a number of resources – including fertilisers, farming tools, seeds, and credit loans. As well as this, farmers can also have more access to formal training programmes and can leverage better marketing and business opportunities – ultimately increasing their potential to receive higher prices for their coffee.
One of the industry experts I spoke to (who wishes to remain anonymous) says that co-ops provide producers with a number of benefits, including “[supporting them] to buy and sell coffee”.
In essence, co-operatives function similarly to non-profit organisations. To join a co-operative, producers need to pay a fee, which is then reinvested back into the community – based on the premise that the combined funds will have more impact than an individual producer’s.
By becoming a co-op member, a producer is likely to have better access to a number of services and resources.
Some co-operatives even buy their members’ coffee and sell it for them. This can be especially beneficial for producers, as it can provide them with better access to a number of different markets which they may not have been able to enter themselves.
Another coffee professional I spoke with, who also wishes to remain anonymous, explains that co-ops can provide producers with more stability against inflation and market volatility. For example, farmers can purchase fertilisers at discounted rates, which can guarantee them better access to much needed resources and allow them to reinvest in their farms.
How are co-operatives affected by fluctuations in the price of coffee?
Although there are a number of benefits to joining a co-operative, the co-op model is not without its issues.
In Kenya, for instance, as many as 50% of the country’s coffee farmers have worked with big estates or co-ops at any given time. However, over the past several decades, the number of co-operative members has been steadily declining. This has largely been attributed to low coffee prices and producers’ claims of a lack of autonomy and reasonable decision making.
Furthermore, recent market volatility is raising an important question around just how profitable co-ops are.
“Coffee farming is a risky business for a number of reasons,” says one industry expert. “In a highly volatile market, the aim is to reduce risk as much as possible, and co-operatives can help farmers to do this.”
They add that by becoming a member of a co-op, producers are more likely to be able to predict the costs of their inputs, enabling them to better understand their potential profits and losses.
The industry expert uses forward buying as an example. In theory, this model allows co-op members to sell their coffee at today’s price, but they are required to deliver the coffee at a future date.
For the producer, this can help to mitigate the risks of future market volatility by ensuring they receive a high enough price for their coffee. However, if the price of coffee then increases a few months later, the farmer will essentially lose money in real terms.
However, through 2021 and 2022, we saw that some producers who had agreed to sell coffee at lower prices abandoned their agreements to try and get a higher price at the current market rate. This is known as strategic defaulting.
Although there are some benefits, strategic defaulting can have a number of negative consequences. For instance, producers could well be blacklisted by co-ops, traders, or roasters.
“In Brazil, where farms are generally larger than other countries, some producers sell up to 80% of their harvest and keep the remaining 20% to hedge against market fluctuations,” one industry expert explains. “Meanwhile, in Colombia, which has a greater number of smaller coffee farmers, producers will sell all of their coffee.”
Ultimately, this means co-op members in Colombia are less protected against market fluctuations – leaving them at more risk. This is especially concerning considering that the Colombian Coffee Growers Federation (FNC) purchases around one-third of the country’s coffee, meaning a large proportion of Colombian co-op members could receive lower prices.
Kyle Bellinger is the CEO and founder of Osito Coffee, which operates in Colombia, the UK, and the US. He explains that because coffee market price regulation works differently in African countries, market volatility is slightly different.
“In Ethiopia and Burundi, for example, the price of coffee is set by the government on a monthly or weekly basis, so it doesn’t change daily like in Colombia and Brazil,” he says.
He adds that because most farmers in countries like Burundi, Kenya, and Ethiopia don’t carry out post-harvest processing themselves, they are also less vulnerable to market fluctuations. However, as a result of carrying out minimal post-harvest processing, they can often receive lower prices for their coffee.
Is there a risk of bankruptcy?
Given the recent increase in contract defaults, one question becomes pertinent: are co-operatives at risk of running out of money?
One industry expert tells me that Colombia in particular experienced this in mid-2022. Out of 38 co-ops in Colombia, four are under liquidation, while several are under the observation of the Superintendencia Solidaria in Colombia. This is the regulating body for co-ops, banks, and financial institutions in the country.
In Colombia, co-ops must report their profits and losses to the Superintendencia Solidaria and if their monthly statements turn negative, the regulatory body will initiate an investigation. Once a co-op is investigated, they are typically under the control of the regulator.
One industry expert tells me this often involves appointing someone who has limited coffee expertise to run the co-op. They add that because of this, it can sometimes result in the dissolution of the co-operative, as the appointed official may not be knowledgeable enough to support the operations of the co-op.
What can be done to support co-operatives?
The dissolution of co-operatives in any coffee-growing country would undoubtedly have detrimental effects on producers, especially for their members. It can prove to be a massive barrier for market access.
One industry expert says price insurance can help protect farmers from market volatility, but this requires paying an upfront fee.
“Farmers don’t want to pay the fee, [and some potentially couldn’t afford to],” they explain. “Co-operatives can’t force producers to pay the insurance fee, otherwise they might lose members.”
Ultimately, producers who are members of co-operatives will only receive payments for their coffee once they have delivered on contracts. This means they may either receive lower prices or will have to wait longer to be paid, leaving them economically vulnerable.
Alternative financing models, such as bartering, can allow farmers to receive the goods and services they need without exchanging money. Farmers will then typically provide the coffee at an agreed upon date – enabling them to use their coffee as a bargaining tool to gain access to the resources they need to invest in their farms.
For Latin American co-operatives in particular, Kyle tells me that establishing more centralised processing stations could allow the farmers to focus more on growing and harvesting coffee, and leave post-harvest processing to other supply chain stakeholders. In theory, this could improve coffee quality and help to increase prices.
“It’s also about farmer-roaster relationships,” Kyle adds. “This often means paying a premium well above the C price when you do buy coffee.”
Despite the recent fall in coffee prices, it still remains unclear how coffee co-operatives and their members will be affected by price fluctuations in the long term.
But one thing is for sure – in order to create a truly sustainable coffee industry, price transparency and stability is key. Without stability over an extended period of time, higher prices and market fluctuations can be disruptive – and potentially have a number of unforeseen consequences.
Enjoyed this? Then read our article on why people are calling for reform in Kenyan coffee production.
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