Frost in Brazil - Are Coffee Prices Going Up?

Everyone in the Specialty Coffee Industry is talking about the recent frosts in Brazil and what it means for the market. From commodity traders and import brokers all the way to coffee drinkers at home, we've all got the same question: are coffee prices going to increase?

Short answer? Yes. Long answer? Yes, but as a home coffee roaster, you really don't need to panic. Longer answer? Well first, we need to talk about Brazil and why it matters so much what happens there. Strap in and buckle up, we're learning about futures, commodities and the wide world of international finance!

It's an older meme sir, but it checks out.

What is the "C Market?"

I'll be honest, I'm not a financial expert, I'm a coffee expert (that's being generous). I mean, people get Master's degrees in finance, it's seriously complicated stuff. That being said, I do know a little bit about the C Market purely because it effects nearly all aspects of coffee buying and selling. So let's keep this as simple as possible! According to Sustainable Harvest, a coffee importer based out of Portland, OR, "The C Market is the global exchange in which the world’s Arabica coffee is bought and sold—i.e traded—every day." Basically, it's a stock ticker for Arabica coffee (there's a separate one for Robusta). Coffee, like Oil, is a commodity, and is traded a bit differently than stocks since it's an actual product and not a share of company ownership, but the idea is basically the same. People who know way more about finance and have a lot more money than me buy and sell C Market futures on the Intercontinental Exchange (ICE), much like traders buy and sell stocks in various stock exchanges around the world. Also, just like stocks, the C Market price is changing constantly as you'll notice in the graph below.

So why do we care? We're not day traders and investment firm mangers! Well, the C Market price is a an indicator or reference point for current coffee prices. If you've bought a home or even a car, you can think of it like prime interest rate. Prime interest rate doesn't determine what your home or can loan interest rate will be, but it serves as a starting point. Your loan might be "2 points above prime" meaning if prime is currently 2%, your loan would be 4%. The C Market price effects all coffee prices in the same way.

Let's provide an example! When I call my broker at Royal Coffee, a coffee importer out of Oakland, CA, he quotes prices on each coffee I want to buy that are valid for today only. If I decide to pull the trigger on my order tomorrow, those prices could be higher or lower than they are today. That's because his prices are tied directly to the C Market which is a constantly moving target. In the same way, I price our coffees based off what we paid for them. I might buy the exact same coffee twice from Royal and besides updating the flavor description since every lot is a little different, I also update the price to reflect what we paid for it at that time. Thankfully, we don't change our prices daily, only once for each coffee each time it arrives in our warehouse. Roasters also do this, although to a less frequent degree. Our coffee prices are fairly fluid, but very large roasters like Starbucks have to price differently because they sell to a different type of consumer who expects less change or volatility. Nonetheless, Starbucks will slowly but surely increase their prices if the C Market goes up, just as they have several times already this year. That means everyone involved in the coffee industry from the farmer to the average Starbucks customer is impacted by this system. So for better or worse, this is what we've got and having at least a functional knowledge of the C Market and what factors can impact it are important.

Brazil IS the C Market

Okay, that's all fine and dandy and complicated but what does frost in Brazil and the C Market have to do with each other? Well, the joke among coffee traders is that Brazil IS the C Market. Brazil produces one third of all the coffee consumed in the world, making it the #1 coffee exporting country. Around 90% of this coffee is Arabica, or C Market coffee. So when a frost hits three of the largest coffee producing regions in Brazil, futures traders freak out. According to Chris Kornman at Royal Coffee "The total losses are unknowable at this point, but the damage is thought to be greater than initially expected. One of our supply partners put the losses at an estimated 4.5 million bags after flying over the affected areas. This represents perhaps 8-10% of the annual estimated yield from the country (depending on who is doing the counting)."

10% of Brazil's annual crop doesn't sound like a lot, but you have to look at the long term as well. Coffee shrubs are quite fragile and very susceptible to frost. Cold weather can even kill a coffee shrub outright and replacing a lost one puts production back an average of 3 years since coffee takes so long to mature and begin fruiting. When news broke, traders panicked and the ensuing frenzy caused the C Market to reach it's highest level in 5 years. “The estimated 4ish million bag loss may seem meager in the scope of Brazil’s usual annual production of approximately 50 million bags, but the foundation for a major move had been laid with worldwide supply chain issues, overall commodity basket volatility, drought, and social unrest in other major producing countries,” notes Alex Mason, a 28-year veteran of the specialty coffee industry and VP of Trading Activity at Royal Coffee.

Is it time to panic yet?

Short Answer? No. Long Answer? Ok, we're not doing this again. Look, I won't lie to you, coffee prices are going to increase. A little. Assuming we've hit the peak of this spike, our prices are looking at increasing an average of about 50 cents per pound, with some coffees going up as little as 20 cents and others going up as much as a dollar. If you roast a pound per week, which is enough for about 2 people, that means your monthly cost will go up by as little as $1 and as much as $4, depending on your coffee preferences. Surprisingly, high end coffees will be impacted less than budget coffees (which is most of what Brazil produces). That's because budget coffee prices are more closely tied to the C Market while high end coffees are priced by actual coffee people who understand their value and not futures traders who think Starbucks coffee is high end. And more importantly, this won't last forever.

Ya'll remember how insanely expensive coffee was in 2011 and 2015 and how everybody went out of business? Yeah, I don't either.

Here's a 10 year graph of the C Market price. See how the price always eventually came down? Sooner or later it will normalize, possibly at a slightly higher level than it was, but this isn't the coffee-pocalypse some alarmists are calling it. Let's see what the CEO of Royal Coffee has to say to coffee business owners like myself:

“With this potentially looking like the first really damaging frost in decades, and only the third time that coffee futures have approached the $2.00 level since the late 1990’s, it is easy to panic,’ says Max Nicholas-Fulmer, CEO of Royal Coffee. “Our advice is to think in shorter time horizons than you may be used to. Many roasters have gotten in the habit of buying for an entire year. Right now, it seems prudent to think in terms of 60 days (about 2 months) at a time. Make sure you have some coffee booked, roast and sell what you need, and check back with us when you have depleted that supply by half. The reality is that a $2.00 market is not that bad." 

And he's right! Just like we see in the graph above, the coffee industry has weathered price spikes like this many times before, at least 3 times in the last decade alone. The people who are worried are super wealthy investment managers and CEOs of mega coffee companies like Starbucks. They might miss their quarterly bonus because margins were too thin! Small business owners and home coffee roasters like you and me will weather this storm just fine. Once again, I'm gonna push my disclaimer, I'm not a financial expert and I definitely don't have a crystal ball. All I can do is talk to other people in the industry and look at past occurrences of big price spikes, frosts and other weather events and see how the industry adapted over a long enough period of time. Based on that, I don't think this is going to be all that bad.

Our plan for the next few months is to avoid budget coffees whose prices are more closely tied to the C Market and focus more on higher end offerings since they won't be as impacted by this spike. Because if I'm paying more for coffee anyways, I might as well be drinking the good stuff. But don't worry budget conscious folks, I totally get it! Times are tough right now and we'll still do our best to offer some budget options and we have no plans to increase our margins. Just know the price increases you might see aren't because I'm getting greedy, it's because investment managers are gambling on the Intercontinental Exchange.

The folks I feel the most for are the farmers in Brazil. They are truly the hardest hit by this frost and my heart goes out to them. Some of them will take years to rebuild if they lost whole plants and not just a percentage of this season's harvest. Hang in there farmers!

Wanna learn more about the C Market? Check out the full article we quoted from Sustainable Harvest: https://www.sustainableharvest.com/blog/c-market-101-what-is-the-c-market

Wanna learn more about the frost in Brazil? Here's the full blog from Royal we quoted several times: https://royalcoffee.com/frost-in-brazil-what-does-it-mean/

Here's another great article about the frost in Brazil (although I thought it was just a smidge alarmist): https://perfectdailygrind.com/2021/07/why-is-frost-in-brazil-causing-global-coffee-prices-to-increase/