When the C market settles, what will it mean for roasters?

The price of arabica is rising, and there seems to be no end in sight. On 16 September, Bloomberg reported that arabica futures (contracts for the physical delivery of green coffee) reached their highest levels in 13 years. In 2024 alone, prices increased by 40% as dry weather conditions in Brazil continue to exacerbate supply shortages.

Simultaneously, the price of robusta has also surpassed record levels in recent weeks. According to some reports, robusta traded higher than arabica for several days in Brazil’s top-producing state of Espirito Santo, which last occurred almost a decade ago.

With the European Union Deforestation Regulation set to be enforced at the year-end, it’s likely that coffee prices will keep climbing for the foreseeable future. Although there will come a time when the market inevitably drops, it’s presently unclear when this could happen.

When it does, navigating the trading sector will be different from what it once was. In the time that the C market has neared historical highs, there has been a wave of consolidation as several smaller specialty-focused green coffee traders have been acquired by bigger players. There are a number of implications to this ongoing acquisition trend, and roasters are set to feel the effects.

I spoke to Karl Wienhold, researcher at the University of Lisbon and author of Cheap Coffee, to find out more.

You may also like our article on why roasters can’t rely on price drops.

Understanding recent C market movements

The C price is the global benchmark for the price of green arabica beans. At its most basic level, it’s determined by supply and demand:

• If there is a shortage of coffee, the price will go up (and may become too high that fewer people buy coffee)
• If there is a lot of coffee available, the price will fall (and more people will buy higher volumes to capitalise on lower prices)

There are, however, a multitude of other complex factors that also influence the market price for coffee – meaning the supply-demand balance isn’t as straightforward as we think.

Karl Wienhold is a researcher and PhD Candidate at the University of Lisbon. He also authored Cheap Coffee: Behind the Curtain of the Global Coffee Trade, which explores the economics and power imbalance of the coffee industry.

“If traders expect that the price of coffee will go up, they may buy more futures contracts in the hopes of selling them at a higher price down the line, which drives the price up,” he explains. The inverse is also true; if buyers speculate that prices will drop, they will sell more futures contracts so the current price will fall.

Because of this speculation, the C price is in constant fluctuation. Additionally, adverse weather conditions, geo-political factors, and supply chain disruptions can all have their own effect.

In recent months, it seems there is fresh news week-on-week that the price of arabica – and robusta – is steadily rising. Excessively dry weather in Brazil and Vietnam, the world’s two biggest coffee producers, is creating supply shortages, and driving up international market prices. For almost a year, the general trend has been upwards. On 16 September 2024, the C price reached its highest level since 2011 – and there are few signs that it will drop any time soon.

Is it possible to predict when coffee prices could fall?

Ultimately, Karl says it’s difficult to know which way the market will swing at any given point.

“I don’t think it’s reasonable to expect that the C price will stay high or that it will eventually drop,” he says. “Based on econometric analyses I’ve conducted, it doesn’t appear nearly as connected with the publicised factors as the industry seems to believe. It’s anyone’s guess.”

Weather predictions can help to gauge how the C price might fluctuate. According to some market analysts, if both Brazil and Vietnam receive sufficient rainfall over the next month, we could see market prices level out. But given that extreme weather events are becoming more common in these countries – including the recent Typhoon Yagi in northern Vietnam and frost in Brazil – there’s evidence to suggest otherwise.

Upcoming legislation could also impact the C market. The EU’s deforestation regulation is set to roll out in December 2024, with some claiming that the strict law could push prices higher. In early July, Lavazza chairman Giuseppe Lavazza told the Financial Times that he didn’t “see any reason why coffee prices [would] go down” in the near future, partly due to the impending EUDR.

But Karl points out that its influence on the global market isn’t so simple.

“If compliant coffee becomes more scarce, EU buyers may have to pay more for it, while non-compliant coffee could sell at a relative discount. If North America, for example, can buy any coffee in the world and there’s a surplus of non-compliant coffee that would have been exported to the EU, then North American buyers have more bargaining power to negotiate prices,” he says.

“This would mean higher physical prices in the EU and lower prices outside of the EU, but not necessarily a net physical surplus or shortage. If the C price responds to physical supply and demand, it shouldn’t change as a result. If it also depends on trader sentiment and signalling between them, then anything is possible.”

How coffee trade consolidation could reshape the market

Against a backdrop of rising prices and high interest rates, the green coffee trading sector is navigating one of its most challenging periods in recent times. We have seen a wave of acquisitions in the market over the last few years as key players have absorbed smaller specialty-focused traders.

In 2018, Neumann Kaffee Gruppe purchased a majority stake in Atlas Coffee Importers. The Hamburg-based trading group then acquired Nordic Approach in 2023, shortly after the specialty trader announced it would reduce its operations. That same year, Sucafina North America acquired Sustainable Harvest under similar circumstances.

At the end of 2023, Mercon Coffee Group – which operated a dedicated specialty division – filed for Chapter 11 bankruptcy. Financial services company StoneX Group stepped in to purchase the company, thereby acquiring its own specialty coffee unit rather than building one from the ground up.

This calls into question whether larger players in the coffee trade sector will be in a better position to adapt when the C price settles. With fewer traders responsible for buying higher volumes of coffee – and more that now operate specialty divisions – larger companies could have a competitive advantage over small and medium-sized operations.

Karl points out, however, that these dynamics have existed for decades, and that consolidation is an expected outcome of market volatility.

“There have been a few acquisitions over the last couple of years, but there are quite a lot of smaller and medium-sized traders still in operation,” he says. “If we look at the industry 15 years ago, I would argue it was more consolidated than it is now. Market volatility in the early 2000s also led to the last wave of consolidation, although the key difference is that the specialty market was much less developed at that time.”

So what can roasters expect once the market settles?

The perfect storm of high coffee prices and high interest rates has shown how vulnerable smaller specialty-focused traders can be to market volatility. For roasters, especially those who also prioritise higher-scoring lots, there could be wider implications for their sourcing models.

Ultimately, they will likely buy coffee (potentially higher volumes due to lower prices) from a smaller, and arguably less diverse, pool of importers. In theory, this could mean increased competition between roasters, who may need to pivot their business models or value propositions to stand out.

Developing closer relationships with traders could also help roasters navigate the market more easily, especially those which focus on sourcing higher-end and exclusive coffees. But with a lower C price, we could see larger traders continue to prioritise efficiency and scale to better protect their margins against future market movements.

The outcomes of market drops for roasters seem unclear at this time. Karl emphasises that there have also been major consolidations in the roasting market over the last few years that have shaped how roasters interact with traders.

“It was uncommon for a specialty roaster to ask for a 60-day, or even 30-day, payment term, but now with specialty roasters like Blue Bottle and Stumptown being acquired by multinationals, they have the power and influence to negotiate better terms more widely,” he says.

“There’s a complex interplay of consolidation between roasters and traders, and the power relationship between them, which impacts industry norms that affect players of all sizes,” he adds. Effectively, this could mean that roasters can leverage better terms to their advantage – buying higher volumes of good quality coffee with more agreeable payment terms.

With no end in sight to high coffee prices, the market will continue to shift. Once it settles, however, roasters will have to navigate a markedly different green coffee-buying landscape.

Uncertainty seems to be an underlying factor in the current market, and it will likely continue that way for the foreseeable future. For now, how exactly roasters will adapt once the C price drops remains to be seen.

Enjoyed this? Then read our article on why buying in cherry may become more acceptable while prices are high.

Perfect Daily Grind

Want to read more articles like this? Sign up for our newsletter!