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July ’18 Editorial comment: Sustainability expert foresees decades-long era of higher prices

July ’18 Editorial comment: Sustainability expert foresees decades-long era of higher prices

This Editorial comment  first appeared in the July ’18 issue of C&CI. Click on subscribe now if you wish to read more informative articles in the July and future issues of C&CI.

As this issue of C&CI was due to go to press, the ‘C’ price on the Intercontinental Exchange was at around US$1.17/ pound, having traded in a range of US$1.15-$1.25 since early March.

Over the past decade, the price has been as high as US$3.06 and as low as US$1.00/pound. For the last 18 months or so prices have been bearish, and although they have peaked now and again in recent years they have not been consistently high – or consistently above the level that farmers need to break even – for a long time. As I write, the prospect of another huge crop in Brazil is weighing on prices.

Ironically, as farmers suffer and have suffered for years from low prices, the coffee industry has been talking up the prospect of supply shortages and higher prices in years to come. Why? Because consumption continues to grow. If you are a coffee farmer, the argument goes, hang in there.

Now, Professor Jeffrey Sachs, the world-renowned professor of economics, leader in sustainable development, senior UN advisor and bestselling author, has swung behind the argument that demand will drive up the C price. Not only that. Whereas prices have been low for a long time, Dr Sachs believes that we could be approaching a turning point when the price turns upwards and remains high for a considerable period of time.

At the request of coffee farming organizations in Colombia and the World Coffee Producers Forum, Professor Sachs has been analysing the behaviour of coffee prices over the last 40 years. Professor Sachs has been working with the forum to assess the impact of evolving coffee value chains on farmers, and to provide proposals for augmenting farmers’ incomes. The first component of the project he is undertaking is reviewing price developments over recent decades, farmers’ incomes over the same period, the relationship between the two, and factors that have affected farmers’ incomes and earnings.

The second component will review initiatives and policies of coffee-producing countries, the private sector, and civil society that have aimed to increase farmer well-being, seeking to understand where initiatives have succeeded or failed, any limitations in scaling such initiatives, and which lessons could be extracted and applied to new proposals for increasing incomes and well-being. The final component of the project will build on these two outputs, providing recommendations for improving the livelihoods of coffee farmers that address both current and future challenges, in particular the implications of climate change.

In a presentation at the International Coffee Organization in Mexico in April, he summarised the results of his research to date on sustainable development in the coffee sector and highlighted work that he and his team plan to carry out in the next few months.

Professor Sachs gave a brief overview of the state of the coffee market and explained that the coffee sector had seen significant increases in production, from 60 million bags per annum in the early 1980s to more than 150 million bags today. Over the same time period, the real price of coffee had fallen – the current price level of around US$1.20 represents roughly one third of the coffee price 40 years ago. He noted that the coffee market was also subject to significant price volatility.

Now for the good news. Following the characterization of past trends in the coffee sector, Professor Sachs continued to develop his research hypothesis. He explained that following more than two decades of declining real coffee prices, the market was likely to move into a 20 to 25-year period of rising prices.

Professor Sachs supported his argument by analysing the supply and demand factors that could shift the equilibrium price upward in the medium- and long-term. On the supply side, he identified the impact of climate change as a major risk. Studies suggest that rising temperatures will adversely affect Arabica output, resulting in lower yields and higher production costs. While large areas of land that could be used for Arabica production may be rendered unsuitable, the scope for migrating production into new areas may be limited due to nature conservation and other physical and economic constraints.

With regard to the demand side, Professor Sachs suggested that consumption in non-traditional markets was likely to increase significantly. For example, with rising income levels and changes in preferences, annual consumption in China could increase from 3.5 million bags today to 50 million bags by 2030. As C&CI highlighted recently, experts have argued that although Brazil will be the leading consuming country by 2040, by then China will have supplanted the US in second place. In traditional markets, such as the US, Dr Sachs argued that consumers may shift from carbonated soft drinks to coffee because of health concerns related to sugar intake and the spread of obesity and diabetes.

Globally, Professor Sachs identified a trend of rising incomes and living standards that was positively correlated with coffee consumption. On balance, the negative impact of climate change on coffee production and the increase in global demand could lead to rising coffee prices, he said.

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